II

105TH CONGRESS

2D SESSION S. 1635

To amend the Internal Revenue Code of 1986 to reduce the maximum

capital gains rates, to index capital assets for inflation, and to repeal

the Federal estate and gift taxes and the tax on generation-skipping

transfers.

IN THE SENATE OF THE UNITED STATES

FEBRUARY 12, 1998

Mr. ALLARD 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 reduce

the maximum capital gains rates, to index capital assets

for inflation, and to repeal the Federal estate and gift

taxes and the tax on generation-skipping transfers.

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

3 SECTION 1. REDUCTION OF MAXIMUM CAPITAL GAINS

4 RATES.

5 (a) TAXPAYERS OTHER THAN CORPORATIONS.—Sec6 tion 1(h) of the Internal Revenue Code of 1986 (relating

7 to maximum capital gains rate) is amended to read as fol8 lows:
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1 ‘‘(h) MAXIMUM CAPITAL GAINS RATE.—

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

3 capital gain for any taxable year, the tax imposed by

4 this section for such taxable year shall not exceed

5 the sum of—

6 ‘‘(A) a tax computed on taxable income re7 duced by the net capital gain, at the rates and

8 in the manner as if this subsection had not

9 been enacted, plus

10 ‘‘(B) 7 percent of so much of the tax11 payer’s net capital gain (or, if less, taxable in12 come) as does not exceed the excess (if any)

13 of—

14 ‘‘(i) the amount of taxable income

15 which would (without regard to this para16 graph) be taxed at a rate below 28 per17 cent, over

18 ‘‘(ii) the taxable income reduced by

19 the net capital gain, plus

20 ‘‘(C) 14 percent of the amount of taxable

21 income in excess of the sum of the amounts on

22 which a tax is determined under subparagraphs

23 (A) and (B).

24 ‘‘(2) INVESTMENT INCOME.—For purposes of

25 this subsection, the net capital gain for any taxable
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1 year shall be reduced (but not below zero) by the

2 amount which the taxpayer elects to take into ac3 count as investment income for the taxable year

4 under section 163(d)(4)(B)(iii).’’.

5 (b) REDUCTION OF ALTERNATIVE CAPITAL GAIN

6 TAX FOR CORPORATIONS.—Section 1201 of the Internal

7 Revenue Code of 1986 (relating to alternative tax for cor8 porations) is amended to read as follows:

9 ‘‘SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS.

10 ‘‘(a) GENERAL RULE.—If for any taxable year a cor11 poration has a net capital gain, then, in lieu of the tax

12 imposed by sections 11, 511, and 831 (a) and (b) (which13 ever is applicable), there is hereby imposed a tax (if such

14 tax is less than the tax imposed by such sections) which

15 shall consist of the sum of—

16 ‘‘(1) a tax computed on the taxable income re17 duced by the amount of the net capital gain, at the

18 rates and in the manner as if this subsection had

19 not been enacted, plus

20 ‘‘(2) a tax of 14 percent of the net capital gain

21 (or, if less, taxable income).

22 ‘‘(b) TRANSITIONAL RULE.—

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

24 year which includes January 1, 1999, the amount

25 taken into account as the net capital gain under
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1 subsection (a) shall not exceed the net capital gain

2 determined by only taking into account gains and

3 losses properly taken into account for the portion of

4 the taxable year after December 31, 1998.

5 ‘‘(2) SPECIAL RULES FOR PASS-THRU ENTI6 TIES.—

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

8 (1) with respect to any pass-thru entity, the de9 termination of when gains and losses are prop10 erly taken into account shall be made at the en11 tity level.

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

13 purposes of subparagraph (A), the term ‘pass14 thru entity’ means—

15 ‘‘(i) a regulated investment company,

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

17 ‘‘(iii) an S corporation,

18 ‘‘(iv) a partnership,

19 ‘‘(v) an estate or trust, and

20 ‘‘(vi) a common trust fund.

21 ‘‘(c) CROSS REFERENCES.—

‘‘For computation of the alternative tax—

‘‘(1) in the case of life insurance companies, see

section 801(a)(2),

‘‘(2) in the case of regulated investment companies and their shareholders, see section 852(b)(3) (A)

and (D), and

‘‘(3) in the case of real estate investment trusts,

see section 857(b)(3)(A).’’
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1 (c) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to taxable years ending after De3 cember 31, 1998.

4 SEC. 2. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF

5 DETERMINING GAIN OR LOSS.

6 (a) IN GENERAL.—Part II of subchapter O of chap7 ter 1 of the Internal Revenue Code of 1986 (relating to

8 basis rules of general application) is amended by inserting

9 after section 1021 the following new section:

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

11 OF DETERMINING GAIN OR LOSS.

12 ‘‘(a) GENERAL RULE.—

13 ‘‘(1) INDEXED BASIS SUBSTITUTED FOR AD14 JUSTED BASIS.—Except as provided in paragraph

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

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

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

18 the asset shall be substituted for its adjusted basis.

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

20 The deduction for depreciation, depletion, and amor21 tization shall be determined without regard to the

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

23 other person.

24 ‘‘(b) INDEXED ASSET.—
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1 ‘‘(1) IN GENERAL.—For purposes of this sec2 tion, the term ‘indexed asset’ means—

3 ‘‘(A) stock in a corporation, and

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

5 therein), which is a capital asset or property

6 used in the trade or business (as defined in sec7 tion 1231(b)).

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

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

10 does not include—

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

12 in property which is in the nature of a credi13 tor’s interest.

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

15 to acquire an interest in property.

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

17 of a lessor, net lease property (within the mean18 ing of subsection (h)(1)).

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

20 which is preferred as to dividends and does not

21 participate in corporate growth to any signifi22 cant extent.

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

24 Stock in—
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1 ‘‘(i) an S corporation (within the

2 meaning of section 1361),

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

4 defined in section 542), and

5 ‘‘(iii) a foreign corporation.

6 ‘‘(3) EXCEPTION FOR STOCK IN FOREIGN COR7 PORATION WHICH IS REGULARLY TRADED ON NA8 TIONAL OR REGIONAL EXCHANGE.—Clause (iii) of

9 paragraph (2)(E) shall not apply to stock in a for10 eign corporation the stock of which is listed on the

11 New York Stock Exchange, the American Stock Ex12 change, or any domestic regional exchange for which

13 quotations are published on a regular basis other

14 than—

15 ‘‘(A) stock of a foreign investment com16 pany (within the meaning of section 1246(b)),

17 and

18 ‘‘(B) stock in a foreign corporation held by

19 a United States person who meets the require20 ments of section 1248(a)(2).

21 ‘‘(c) INDEXED BASIS.—For purposes of this sec22 tion—

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

24 any asset is—
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1 ‘‘(A) the adjusted basis of the asset, in2 creased by

3 ‘‘(B) the applicable inflation adjustment.

4 ‘‘(2) APPLICABLE INFLATION ADJUSTMENT.—

5 The applicable inflation adjustment for any asset is

6 an amount equal to—

7 ‘‘(A) the adjusted basis of the asset, multi8 plied by

9 ‘‘(B) the percentage (if any) by which—

10 ‘‘(i) the chain-type price index for

11 GDP for the last calendar quarter ending

12 before the asset is disposed of, exceeds

13 ‘‘(ii) the chain-type price index for

14 GDP for the last calendar quarter ending

15 before the asset was acquired by the tax16 payer.

17 The percentage under subparagraph (B) shall be

rounded to the nearest 1 18 ⁄10 of 1 percentage point.

19 ‘‘(3) CHAIN-TYPE PRICE INDEX FOR GDP.—

20 The chain-type price index for GDP for any calendar

21 quarter is such index for such quarter (as shown in

22 the last revision thereof released by the Secretary of

23 Commerce before the close of the following calendar

24 quarter).
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1 ‘‘(d) SPECIAL RULES.—For purposes of this sec2 tion—

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

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

5 a separate asset:

6 ‘‘(A) a substantial improvement to prop7 erty,

8 ‘‘(B) in the case of stock of a corporation,

9 a substantial contribution to capital, and

10 ‘‘(C) any other portion of an asset to the

11 extent that separate treatment of such portion

12 is appropriate to carry out the purposes of this

13 section.

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

15 THROUGHOUT HOLDING PERIOD.—

16 ‘‘(A) IN GENERAL.—The applicable infla17 tion ratio shall be appropriately reduced for cal18 endar months at any time during which the

19 asset was not an indexed asset.

20 ‘‘(B) CERTAIN SHORT SALES.—For pur21 poses of applying subparagraph (A), an asset

22 shall be treated as not an indexed asset for any

23 short sale period during which the taxpayer or

24 the taxpayer’s spouse sells short property sub25 stantially identical to the asset. For purposes of
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1 the preceding sentence, the short sale period be2 gins on the day after the substantially identical

3 property is sold and ends on the closing date

4 for the sale.

5 ‘‘(3) TREATMENT OF CERTAIN DISTRIBU6 TIONS.—A distribution with respect to stock in a

7 corporation which is not a dividend shall be treated

8 as a disposition.

9 ‘‘(4) SECTION CANNOT INCREASE ORDINARY

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

11 this section would create or increase a net ordinary

12 loss to which section 1231(a)(2) applies or an ordi13 nary loss to which any other provision of this title

14 applies, such provision shall not apply. The taxpayer

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

16 an amount equal to the amount of the ordinary loss

17 to which the preceding sentence applies.

18 ‘‘(5) ACQUISITION DATE WHERE THERE HAS

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

20 WITH RESPECT TO THE TAXPAYER.—If there has

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

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

23 date of acquisition of such asset by the taxpayer

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

25 most recent such prior application.
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1 ‘‘(6) COLLAPSIBLE CORPORATIONS.—The appli2 cation of section 341(a) (relating to collapsible cor3 porations) shall be determined without regard to this

4 section.

5 ‘‘(e) CERTAIN CONDUIT ENTITIES.—

6 ‘‘(1) REGULATED INVESTMENT COMPANIES;

7 REAL ESTATE INVESTMENT TRUSTS; COMMON TRUST

8 FUNDS.—

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

10 investment entity shall be an indexed asset for

11 any calendar month in the same ratio as the

12 fair market value of the assets held by such en13 tity at the close of such month which are in14 dexed assets bears to the fair market value of

15 all assets of such entity at the close of such

16 month.

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

18 the ratio for any calendar month determined

19 under subparagraph (A) would (but for this

20 subparagraph) be 90 percent or more, such

21 ratio for such month shall be 100 percent.

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

23 the ratio for any calendar month determined

24 under subparagraph (A) would (but for this
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1 subparagraph) be 10 percent or less, such ratio

2 for such month shall be zero.

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

4 REAL ESTATE INVESTMENT TRUSTS.—Nothing

5 in this paragraph shall require a real estate in6 vestment trust to value its assets more fre7 quently than once each 36 months (except

8 where such trust ceases to exist). The ratio

9 under subparagraph (A) for any calendar

10 month for which there is no valuation shall be

11 the trustee’s good faith judgment as to such

12 valuation.

13 ‘‘(E) QUALIFIED INVESTMENT ENTITY.—

14 For purposes of this paragraph, the term

15 ‘qualified investment entity’ means—

16 ‘‘(i) a regulated investment company

17 (within the meaning of section 851),

18 ‘‘(ii) a real estate investment trust

19 (within the meaning of section 856), and

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

21 meaning of section 584).

22 ‘‘(2) PARTNERSHIPS.—In the case of a partner23 ship, the adjustment made under subsection (a) at

24 the partnership level shall be passed through to the

25 partners.
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1 ‘‘(3) SUBCHAPTER S CORPORATIONS.—In the

2 case of an electing small business corporation, the

3 adjustment under subsection (a) at the corporate

4 level shall be passed through to the shareholders.

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

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

7 to any sale or other disposition of property between

8 related persons except to the extent that the basis

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

10 substituted basis.

11 ‘‘(2) RELATED PERSONS DEFINED.—For pur12 poses of this section, the term ‘related persons’

13 means—

14 ‘‘(A) persons bearing a relationship set

15 forth in section 267(b), and

16 ‘‘(B) persons treated as single employer

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

18 ‘‘(g) TRANSFERS TO INCREASE INDEXING ADJUST19 MENT OR DEPRECIATION ALLOWANCE.—If any person

20 transfers cash, debt, or any other property to another per21 son and the principal purpose of such transfer is—

22 ‘‘(1) to secure or increase an adjustment under

23 subsection (a), or
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1 ‘‘(2) to increase (by reason of an adjustment

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

3 depletion, or amortization,

4 the Secretary may disallow part or all of such adjustment

5 or increase.

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

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

8 term ‘net lease property’ means leased real property

9 where—

10 ‘‘(A) the term of the lease (taking into ac11 count options to renew) was 50 percent or more

12 of the useful life of the property, and

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

14 of the deductions with respect to such property

15 which are allowable to the lessor solely by rea16 son of section 162 (other than rents and reim17 bursed amounts with respect to such property)

18 is 15 percent or less of the rental income pro19 duced by such property.

20 ‘‘(2) STOCK INCLUDES INTEREST IN COMMON

21 TRUST FUND.—The term ‘stock in a corporation’ in22 cludes any interest in a common trust fund (as de23 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) CLERICAL AMENDMENT.—The table of sections

5 for part II of subchapter O of such chapter 1 of the Inter6 nal Revenue Code of 1986 is amended by inserting after

7 the item relating to section 1021 the following 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 of the Internal Revenue Code of 1986 (relat11 ing to effect on earnings and profits of gain or loss and

12 of receipt of tax-free distributions) is amended by adding

13 at the end thereof the following new 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

after December 31, 1998, see section 1022(a)(1).’’

16 (d) EFFECTIVE DATES.—

17 (1) IN GENERAL.—The amendments made by

18 this section shall apply to the disposition of any

19 property the holding period of which begins after

20 December 31, 1998.

21 (2) CERTAIN TRANSACTIONS BETWEEN RELAT22 ED PERSONS.—The amendments made by this sec-
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1 tion shall not apply to the disposition of any prop2 erty acquired after December 31, 1998, from a re3 lated person (as defined in section 1022(f)(2) of the

4 Internal Revenue Code of 1986, as added by this

5 section) if—

6 (A) such property was so acquired for a

7 price less than the property’s fair market value,

8 and

9 (B) the amendments made by this section

10 did not apply to such property in the hands of

11 such related person.

12 SEC. 3. REPEAL OF CERTAIN FEDERAL TRANSFER TAXES.

13 (a) IN GENERAL.—Subtitle B of the Internal Reve14 nue Code of 1986 is repealed.

15 (b) EFFECTIVE DATE.—The repeal made by sub16 section (a) shall apply to the estates of decedents dying,

17 and gifts and generation-skipping transfers made, after

18 the date of enactment of this Act.

19 (c) TECHNICAL AND CONFORMING CHANGES.—The

20 Secretary of the Treasury or the Secretary’s delegate

21 shall, as soon as practicable but in any event not later

22 than 90 days after the date of enactment of this Act, sub23 mit to the Committee on Ways and Means of the House

24 of Representatives and the Committee on Finance of the

25 Senate a draft of any technical and conforming changes
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1 in the Internal Revenue Code of 1986 which are necessary

2 to reflect throughout such Code the changes in the sub3 stantive provisions of law made by this Act.

Æ