II

103D CONGRESS

2D SESSION S. 1829

To amend the Internal Revenue Code of 1986 to provide tax incentives

to encourage small investors, and for other purposes.

IN THE SENATE OF THE UNITED STATES

FEBRUARY 4 (legislative day, JANUARY 25), 1994

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 provide

tax incentives to encourage small investors, 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 ‘‘Small Investors Tax Relief Act of 1994’’.

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. EXEMPTION OF CERTAIN INTEREST AND DIVIDEND

4 INCOME FROM TAX.

5 (a) IN GENERAL.—Part III of subchapter B of chap6 ter 1 (relating to amounts specifically excluded from gross

7 income) is amended by inserting after section 115 the fol8 lowing new section:

9 ‘‘SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS AND INTER10 EST RECEIVED BY INDIVIDUALS.

11 ‘‘(a) EXCLUSION FROM GROSS INCOME.—Gross in12 come does not include the sum of the amounts received

13 during the taxable year by an individual as—

14 ‘‘(1) dividends from domestic corporations, or

15 ‘‘(2) interest.

16 ‘‘(b) LIMITATIONS.—

17 ‘‘(1) MAXIMUM AMOUNT.—The aggregate

18 amount excluded under subsection (a) for any tax19 able year shall not exceed $2,000 ($4,000 in the

20 case of a joint return).

21 ‘‘(2) CERTAIN DIVIDENDS EXCLUDED.—Sub22 section (a)(1) shall not apply to any dividend from

23 a corporation which, for the taxable year of the cor24 poration in which the distribution is made, or for the

25 next preceding taxable year of the corporation, is a
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1 corporation exempt from tax under section 501 (re2 lating to certain charitable, etc., organization) or

3 section 521 (relating to farmers’ cooperative associa4 tions).

5 ‘‘(3) INDEXING FOR INFLATION.—In the case of

6 any taxable year beginning after 1995—

7 ‘‘(A) the $2,000 amount under paragraph

8 (1) shall be increased by an amount equal to—

9 ‘‘(i) $2,000, multiplied by

10 ‘‘(ii) the cost-of-living adjustment

11 under section 1(f)(3) for the calendar year

12 in which the taxable year begins, except

13 that subparagraph (B) thereof shall be ap14 plied by substituting ‘1994’ for ‘1992’, and

15 ‘‘(B) the $4,000 amount under paragraph

16 (1) shall be increased to an amount equal to

17 twice the amount determined under subpara18 graph (A) for the taxable year.

19 If the dollar amount determined after the increase

20 under subparagraph (A) is not a multiple of $100,

21 such dollar amount shall be rounded to the next low22 est multiple of $100.

23 ‘‘(c) SPECIAL RULES.—For purposes of this sec24 tion—
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1 ‘‘(1) DISTRIBUTIONS FROM REGULATED IN2 VESTMENT COMPANIES AND REAL ESTATE INVEST3 MENT TRUSTS.—Subsection (a) shall apply with re4 spect to distributions by—

5 ‘‘(A) regulated investment companies to

6 the extent provided in section 854(c), and

7 ‘‘(B) real estate investment trusts to the

8 extent provided in section 857(c).

9 ‘‘(2) DISTRIBUTIONS BY A TRUST.—For pur10 poses of subsection (a), the amount of dividends and

11 interest properly allocable to a beneficiary under sec12 tion 652 or 662 shall be deemed to have been re13 ceived by the beneficiary ratably on the same date

14 that the dividends and interest were received by the

15 estate or trust.

16 ‘‘(3) CERTAIN NONRESIDENT ALIENS INELI17 GIBLE FOR EXCLUSION.—In the case of a non18 resident alien individual, subsection (a) shall apply

19 only—

20 ‘‘(A) in determining the tax imposed for

21 the taxable year pursuant to section 871(b)(1)

22 and only in respect of dividends and interest

23 which are effectively connected with the conduct

24 of a trade or business within the United States,

25 or
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1 ‘‘(B) in determining the tax imposed for

2 the taxable year pursuant to section 877(b).’’

3 (b) CLERICAL AND CONFORMING AMENDMENTS.—

4 (1) The table of sections for part III of sub5 chapter B of chapter 1 is amended by inserting after

6 the item relating to section 115 the following new

7 item:

‘‘Sec. 116. Partial exclusion of dividends and interest received by

individuals.’’

8 (2) Paragraph (2) of section 265(a) is amended

9 by inserting before the period at the end thereof the

10 following: ‘‘, or to purchase or carry obligations or

11 shares, or to make deposits, to the extent the inter12 est thereon is excludable from gross income under

13 section 116’’.

14 (3) Subsection (c) of section 584 is amended by

15 adding at the end the following new sentence:

16 ‘‘The proportionate share of each participant in the

17 amount of dividends or interest received by the common

18 trust fund and to which section 116 applies shall be con19 sidered for purposes of such section as having been re20 ceived by such participant.’’

21 (4) Subsection (a) of section 643 is amended by

22 inserting after paragraph (6) the following new

23 paragraph:
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1 ‘‘(7) DIVIDENDS OR INTEREST.—There shall be

2 included the amount of any dividends or interest ex3 cluded from gross income pursuant to section 116.’’

4 (5) Section 854 is amended by adding at the

5 end the following new subsection:

6 ‘‘(c) TREATMENT UNDER SECTION 116.—

7 ‘‘(1) IN GENERAL.—For purposes of section

8 116, in the case of any dividend (other than a divi9 dend described in subsection (a)) received from a

10 regulated investment company which meets the re11 quirements of section 852 for the taxable year in

12 which it paid the dividend—

13 ‘‘(A) the entire amount of such dividend

14 shall be treated as a dividend if the aggregate

15 dividends and interest received by such com16 pany during the taxable year equal or exceed 75

17 percent of its gross income, or

18 ‘‘(B) if subparagraph (A) does not apply,

19 a portion of such dividend shall be treated as

20 a dividend (and a portion of such dividend shall

21 be treated as interest) based on the portion of

22 the company’s gross income which consists of

23 aggregate dividends or aggregate interest, as

24 the case may be.
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1 For purposes of the preceding sentence, gross in2 come and aggregate interest received shall each be

3 reduced by so much of the deduction allowable by

4 section 163 for the taxable year as does not exceed

5 aggregate interest received for the taxable year.

6 ‘‘(2) NOTICE TO SHAREHOLDERS.—The amount

7 of any distribution by a regulated investment com8 pany which may be taken into account as a dividend

9 for purposes of the exclusion under section 116 shall

10 not exceed the amount so designated by the com11 pany in a written notice to its shareholders mailed

12 not later than 45 days after the close of its taxable

13 year.

14 ‘‘(3) DEFINITIONS.—For purposes of this sub15 section—

16 ‘‘(A) the term ‘gross income’ does not in17 clude gain from the sale or other disposition of

18 stock or securities, and

19 ‘‘(B) the term ‘aggregate dividends re20 ceived’ includes only dividends received from do21 mestic corporations other than dividends de22 scribed in section 116(b)(2).

23 In determining the amount of any dividend for pur24 poses of subparagraph (B), the rules provided in sec-
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1 tion 116(c)(1) (relating to certain distributions)

2 shall apply.’’

3 (6) Subsection (c) of section 857 of such Code

4 is amended to read as follows:

5 ‘‘(c) LIMITATIONS APPLICABLE TO DIVIDENDS RE6 CEIVED FROM REAL ESTATE INVESTMENT TRUSTS.—

7 ‘‘(1) IN GENERAL.—For purposes of section

8 116 (relating to an exclusion for dividends and inter9 est received by individuals) and section 243 (relating

10 to deductions for dividends received by corpora11 tions), a dividend received from a real estate invest12 ment trust which meets the requirements of this

13 part shall not be considered as a dividend.

14 ‘‘(2) TREATMENT AS INTEREST.—In the case of

15 a dividend (other than a capital gain dividend, as de16 fined in subsection (b)(3)(C)) received from a real

17 estate investment trust which meets the require18 ments of this part for the taxable year in which it

19 paid the dividend—

20 ‘‘(A) such dividend shall be treated as in21 terest if the aggregate interest received by the

22 real estate investment trust for the taxable year

23 equals or exceeds 75 percent of its gross in24 come, or
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1 ‘‘(B) if subparagraph (A) does not apply,

2 the portion of such dividend which bears the

3 same ratio to the amount of such dividend as

4 the aggregate interest received bears to gross

5 income shall be treated as interest.

6 ‘‘(3) ADJUSTMENTS TO GROSS INCOME AND AG7 GREGATE INTEREST RECEIVED.—For purposes of

8 paragraph (2)—

9 ‘‘(A) gross income does not include the net

10 capital gain,

11 ‘‘(B) gross income and aggregate interest

12 received shall each be reduced by so much of

13 the deduction allowable by section 163 for the

14 taxable year (other than for interest on mort15 gages on real property owned by the real estate

16 investment trust) as does not exceed aggregate

17 interest received by the taxable year, and

18 ‘‘(C) gross income shall be reduced by the

19 sum of the taxes imposed by paragraphs (4),

20 (5), and (6) of section 857(b).

21 ‘‘(4) NOTICE TO SHAREHOLDERS.—The amount

22 of any distribution by a real estate investment trust

23 which may be taken into account as interest for pur24 poses of the exclusion under section 116 shall not

25 exceed the amount so designated by the trust in a
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1 written notice to its shareholders mailed not later

2 than 45 days after the close of its taxable year.’’

3 (c) EFFECTIVE DATE.—The amendments made by

4 this section shall apply with respect to amounts received

5 after December 31, 1994, in taxable years ending after

6 such date.

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

8 DETERMINING GAIN OR LOSS.

9 (a) IN GENERAL.—Part II of subchapter O of chap10 ter 1 (relating to basis rules of general application) is

11 amended by inserting after section 1021 the following new

12 section:

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

14 OF DETERMINING GAIN OR LOSS.

15 ‘‘(a) GENERAL RULE.—

16 ‘‘(1) INDEXED BASIS SUBSTITUTED FOR AD17 JUSTED BASIS.—Except as provided in paragraph

18 (2), if an indexed asset which has been held for

19 more than 1 year is sold or otherwise disposed of,

20 then, for purposes of this title, the indexed basis of

21 the asset shall be substituted for its adjusted basis.

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

23 The deduction for depreciation, depletion, and amor24 tization shall be determined without regard to the
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1 application of paragraph (1) to the taxpayer or any

2 other person.

3 ‘‘(b) INDEXED ASSET.—

4 ‘‘(1) IN GENERAL.—For purposes of this sec5 tion, the term ‘indexed asset’ means—

6 ‘‘(A) stock in a corporation,

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

8 therein), which is a capital asset or property

9 used in the trade or business (as defined in sec10 tion 1231(b)), and

11 ‘‘(C) the principal residence of the tax12 payer (within the meaning of section 1034).

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

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

15 does not include—

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

17 in property which is in the nature of a credi18 tor’s interest.

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

20 to acquire an interest in property.

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

22 of a lessor, net lease property (within the mean23 ing of subsection (h)(1)).

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

25 which is preferred as to dividends and does not
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1 participate in corporate growth to any signifi2 cant extent.

3 ‘‘(E) STOCK IN CERTAIN CORPORATIONS.—

4 Stock in—

5 ‘‘(i) an S corporation (within the

6 meaning of section 1361),

7 ‘‘(ii) a personal holding company (as

8 defined in section 542), and

9 ‘‘(iii) a foreign corporation.

10 ‘‘(3) EXCEPTION FOR STOCK IN FOREIGN COR11 PORATION WHICH IS REGULARLY TRADED ON NA12 TIONAL OR REGIONAL EXCHANGE.—Clause (iii) of

13 paragraph (2)(E) shall not apply to stock in a for14 eign corporation the stock of which is listed on the

15 New York Stock Exchange, the American Stock Ex16 change, or any domestic regional exchange for which

17 quotations are published on a regular basis other

18 than—

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

21 and

22 ‘‘(B) 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 is the percent10 age arrived at 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 asset was ac16 quired by the taxpayer (or, in the case of an

17 asset acquired before 1995, the CPI for 1993).

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-tenth of 1 percent.

22 ‘‘(3) CPI.—The CPI for any calendar year shall

23 be determined under section 1(f)(4).
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1 ‘‘(4) SECRETARY TO PUBLISH TABLES.—The

2 Secretary shall publish tables specifying the applica3 ble inflation ratio for each calendar year.

4 ‘‘(d) SPECIAL RULES.—For purposes of this sec5 tion—

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

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

8 a separate asset:

9 ‘‘(A) A substantial improvement to prop10 erty.

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

12 a substantial contribution to capital.

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

14 extent that separate treatment of such portion

15 is appropriate to carry out the purposes of this

16 section.

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

18 THROUGHOUT HOLDING PERIOD.—

19 ‘‘(A) IN GENERAL.—The applicable infla20 tion ratio shall be appropriately reduced for cal21 endar months at any time during which the

22 asset was not an indexed asset.

23 ‘‘(B) CERTAIN SHORT SALES.—For pur24 poses of applying subparagraph (A), an asset

25 shall be treated as not an indexed asset for any
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1 short sale period during which the taxpayer or

2 the taxpayer’s spouse sells short property sub3 stantially identical to the asset. For purposes of

4 the preceding sentence, the short sale period be5 gins on the day after the substantially identical

6 property is sold and ends on the closing date

7 for the sale.

8 ‘‘(3) TREATMENT OF CERTAIN DISTRIBU9 TIONS.—A distribution with respect to stock in a

10 corporation which is not a dividend shall be treated

11 as a disposition.

12 ‘‘(4) SECTION CANNOT INCREASE ORDINARY

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

14 this section would create or increase a net ordinary

15 loss to which section 1231(a)(2) applies or an ordi16 nary loss to which any other provision of this title

17 applies, such provision shall not apply. The taxpayer

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

19 an amount equal to the amount of the ordinary loss

20 to which the preceding sentence applies.

21 ‘‘(5) ACQUISITION DATE WHERE THERE HAS

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

23 WITH RESPECT TO THE TAXPAYER.—If there has

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

25 asset while such asset was held by the taxpayer, the
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1 date of acquisition of such asset by the taxpayer

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

3 most recent such prior application.

4 ‘‘(6) COLLAPSIBLE CORPORATIONS.—The appli5 cation of section 341(a) (relating to collapsible

6 corporations) shall be determined without regard to

7 this section.

8 ‘‘(e) CERTAIN CONDUIT ENTITIES.—

9 ‘‘(1) REGULATED INVESTMENT COMPANIES;

10 REAL ESTATE INVESTMENT TRUSTS; COMMON TRUST

11 FUNDS.—

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

13 investment entity shall be an indexed asset for

14 any calendar month in the same ratio as the

15 fair market value of the assets held by such en16 tity at the close of such month which are in17 dexed assets bears to the fair market value of

18 all assets of such entity at the close of such

19 month.

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

21 the ratio for any calendar month determined

22 under subparagraph (A) would (but for this

23 subparagraph) be 90 percent or more, such

24 ratio for such month shall be 100 percent.
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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 ‘‘(E) QUALIFIED INVESTMENT ENTITY.—

17 For purposes of this paragraph, the term

18 ‘qualified investment entity’ means—

19 ‘‘(i) a regulated investment company

20 (within the meaning of section 851),

21 ‘‘(ii) a real estate investment trust

22 (within the meaning of section 856), and

23 ‘‘(iii) a common trust fund (within the

24 meaning of section 584).
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1 ‘‘(2) PARTNERSHIPS.—In the case of a partner2 ship, the adjustment made under subsection (a) at

3 the partnership level shall be passed through to the

4 partners.

5 ‘‘(3) SUBCHAPTER S CORPORATIONS.—In the

6 case of an electing small business corporation, the

7 adjustment under subsection (a) at the corporate

8 level shall be passed through to the shareholders.

9 ‘‘(f) DISPOSITIONS BETWEEN RELATED PERSONS.—

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

11 to any sale or other disposition of property between

12 related persons except to the extent that the basis

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

14 substituted basis.

15 ‘‘(2) RELATED PERSONS DEFINED.—For pur16 poses of this section, the term ‘related persons’

17 means—

18 ‘‘(A) persons bearing a relationship set

19 forth in section 267(b), and

20 ‘‘(B) persons treated as single employer

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

22 ‘‘(g) TRANSFERS TO INCREASE INDEXING ADJUST23 MENT OR DEPRECIATION ALLOWANCE.—If any person

24 transfers cash, debt, or any other property to another per25 son and the principal purpose of such transfer is—
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1 ‘‘(1) to secure or increase an adjustment under

2 subsection (a), or

3 ‘‘(2) to increase (by reason of an adjustment

4 under subsection (a)) a deduction for depreciation,

5 depletion, or amortization,

6 the Secretary may disallow part or all of such adjustment

7 or increase.

8 ‘‘(h) DEFINITIONS.—For purposes of this section—

9 ‘‘(1) NET LEASE PROPERTY DEFINED.—The

10 term ‘net lease property’ means leased real property

11 where—

12 ‘‘(A) the term of the lease (taking into ac13 count options to renew) was 50 percent or more

14 of the useful life of the property, and

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

16 of the deductions with respect to such property

17 which are allowable to the lessor solely by rea18 son of section 162 (other than rents and reim19 bursed amounts with respect to such property)

20 is 15 percent or less of the rental income pro21 duced by such property.

22 ‘‘(2) STOCK INCLUDES INTEREST IN COMMON

23 TRUST FUND.—The term ‘stock in a corporation’ in24 cludes any interest in a common trust fund (as de25 fined in section 584(a)).
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1 ‘‘(i) 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) ADJUSTMENT TO APPLY FOR PURPOSES OF DE5 TERMINING EARNINGS AND PROFITS.—Subsection (f) of

6 section 312 (relating to effect on earnings and profits of

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

8 amended by adding at the end thereof the following new

9 paragraph:

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

11 INDEXED BASIS.—

‘‘For substitution of indexed basis for adjusted

basis in the case of the disposition of certain assets

after December 31, 1994, see section 1022(a)(1).’’

12 (c) CLERICAL AMENDMENT.—The table of sections

13 for part II of subchapter O of such chapter 1 is amended

14 by inserting after the item relating to section 1021 the

15 following new item:

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

gain or loss.’’

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

17 this section shall apply to dispositions after December 31,

18 1994.

19 SEC. 4. REDUCTION IN CAPITAL GAINS TAX FOR INDIVID20 UALS.

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

22 chapter 1 (relating to treatment of capital gains) is
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1 amended by adding at the end thereof the following new

2 section:

3 ‘‘SEC. 1203. CAPITAL GAINS DEDUCTION FOR INDIVIDUALS.

4 ‘‘(a) IN GENERAL.—In the case of an individual,

5 there shall be allowed as a deduction for the taxable year

6 an amount equal to the annual capital gains deduction (if

7 any) determined under subsection (b).

8 ‘‘(b) ANNUAL CAPITAL GAINS DEDUCTION.—

9 ‘‘(1) IN GENERAL.—For purposes of subsection

10 (a), the annual capital gains deduction determined

11 under this subsection is the lesser of—

12 ‘‘(A) the net capital gain for the taxable

13 year, or

14 ‘‘(B) $50,000 ($100,000 in the case of a

15 joint return).

16 ‘‘(2) COORDINATION WITH EXCLUSION FOR

17 GAIN FROM SMALL BUSINESS STOCK.—For purposes

18 of paragraph (1)(A), net capital gain shall be deter19 mined without regard to any gain from the sale or

20 exchange of qualified small business stock (as de21 fined in section 1202(c)) held for more than 5 years.

22 ‘‘(3) CERTAIN INDIVIDUALS NOT ELIGIBLE.—

23 This subsection shall not apply to any individual

24 with respect to whom a deduction under section 151

25 is allowable to another taxpayer for a taxable year
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1 beginning in the calendar year in which such individ2 ual’s taxable year begins.

3 ‘‘(4) ANNUAL DEDUCTION NOT AVAILABLE FOR

4 SALES TO RELATED PERSONS.—The amount of the

5 net capital gain taken into account under paragraph

6 (1)(A) shall not exceed the amount of the net capital

7 gain determined by not taking into account gains

8 and losses from sales and exchanges to any related

9 person (as defined in section 267(f)).

10 ‘‘(5) INDEXING FOR INFLATION.—In the case of

11 any taxable year beginning after 1995—

12 ‘‘(A) the $50,000 amount under paragraph

13 (1)(B) shall be increased by an amount equal

14 to—

15 ‘‘(i) $50,000, multiplied by

16 ‘‘(ii) the cost-of-living adjustment

17 under section 1(f)(3) for the calendar year

18 in which the taxable year begins, except

19 that subparagraph (B) thereof shall be ap20 plied by substituting ‘1994’ for ‘1992’, and

21 ‘‘(B) the $100,000 amount under para22 graph (1)(B) shall be increased to an amount

23 equal to twice the amount determined under

24 subparagraph (A) for the taxable year.
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1 If the dollar amount determined after the increase

2 under this paragraph is not a multiple of $1,000,

3 such dollar amount shall be rounded to the next low4 est multiple of $1,000.

5 ‘‘(c) SECTION NOT TO APPLY TO ESTATES OR

6 TRUSTS.—No deduction shall be allowed under this sec7 tion to an estate or trust.

8 ‘‘(d) SPECIAL RULES.—

9 ‘‘(1) DEDUCTION AVAILABLE ONLY FOR SALES

10 OR EXCHANGES AFTER DECEMBER 31, 1994.—The

11 amount of the net capital gain taken into account

12 under subsection (b)(1)(A) shall not exceed the

13 amount of the net capital gain determined by only

14 taking into account gains and losses from sales and

15 exchanges after December 31, 1994.

16 ‘‘(2) SPECIAL RULE FOR PASS-THRU ENTI17 TIES.—

18 ‘‘(A) IN GENERAL.—In applying this sec19 tion with respect to any pass-thru entity, the

20 determination of when the sale or exchange oc21 curs shall be made at the entity level.

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

23 purposes of subparagraph (A), the term ‘pass24 thru entity’ means—

25 ‘‘(i) a regulated investment company,
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1 ‘‘(ii) a real estate investment trust,

2 ‘‘(iii) an S corporation,

3 ‘‘(iv) a partnership,

4 ‘‘(v) an estate or trust, and

5 ‘‘(vi) a common trust fund.’’

6 (b) CONFORMING AMENDMENTS.—

7 (1) Subsection (a) of section 62 is amended by

8 inserting after paragraph (15) the following new

9 paragraph:

10 ‘‘(16) CAPITAL GAINS DEDUCTION.—The deduc11 tion allowed by section 1203.’’

12 (2) Paragraph (2) of section 172(d) is amended

13 by inserting ‘‘and the deduction provided by section

14 1203’’ after ‘‘1202’’.

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

16 is amended to read as follows:

17 ‘‘SEC. 220. CROSS REFERENCES.

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

of a taxpayer other than a corporation, see section

1203.

‘‘(2) For deductions in respect of a decedent, see

section 691.’’

18 (B) The table of sections for part VII of sub19 chapter B of chapter 1 is amended by striking ‘‘ref20 erence’’ in the item relating to section 220 and in21 serting ‘‘references’’.

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

23 by inserting ‘‘1203,’’ after ‘‘1202,’’.
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1 (5) The second sentence of paragraph (2) of

2 section 871(a) is amended by inserting ‘‘or 1203’’

3 after ‘‘1202’’.

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

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

6 adding at the end thereof the following new item:

‘‘Sec. 1203. Capital gains deduction for individuals.’’

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

8 this section shall apply to sales or exchanges after Decem9 ber 31, 1994, in taxable years ending after such date.

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