II

105TH CONGRESS

2D SESSION S. 1711

To amend the Internal Revenue Code of 1986 to eliminate the marriage

penalty tax, to increase the income levels for the 15 and 28 percent

tax brackets, to provide a 1-year holding period for long-term capital

gains, to index capital assets for inflation, to reduce the highest estate

tax rate to 28 percent, and for other purposes.

IN THE SENATE OF THE UNITED STATES

MARCH 5, 1998

Mrs. HUTCHISON (for herself, Mr. GRAMS, and Mr. ASHCROFT) 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 eliminate

the marriage penalty tax, to increase the income levels

for the 15 and 28 percent tax brackets, to provide a

1-year holding period for long-term capital gains, to

index capital assets for inflation, to reduce the highest

estate tax rate to 28 percent, 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 ‘‘Half and Half: Tax Relief and Debt Reduction Act of

6 1998’’.
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1 (b) AMENDMENT OF 1986 CODE.—Except as other2 wise expressly provided, whenever in this Act an amend3 ment or repeal is expressed in terms of an amendment

4 to, or repeal of, a section or other provision, the reference

5 shall be considered to be made to a section or other provi6 sion of the Internal Revenue Code of 1986.

7 (c) SECTION 15 NOT TO APPLY.—No amendment

8 made by section 3 shall be treated as a change in a rate

9 of tax for purposes of section 15 of the Internal Revenue

10 Code of 1986 .

11 SEC. 2. COMBINED RETURN TO WHICH UNMARRIED RATES

12 APPLY.

13 (a) IN GENERAL.—Subpart B of part II of sub14 chapter A of chapter 61 (relating to income tax returns)

15 is amended by inserting after section 6013 the following

16 new section:

17 ‘‘SEC. 6013A. COMBINED RETURN WITH SEPARATE RATES.

18 ‘‘(a) GENERAL RULE.—A husband and wife may

19 make a combined return of income taxes under subtitle

20 A under which—

21 ‘‘(1) a separate taxable income is determined

22 for each spouse by applying the rules provided in

23 this section, and

24 ‘‘(2) the tax imposed by section 1 is the aggre25 gate amount resulting from applying the separate
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1 rates set forth in section 1(c) to each such taxable

2 income.

3 ‘‘(b) TREATMENT OF INCOME.—For purposes of this

4 section—

5 ‘‘(1) earned income (within the meaning of sec6 tion 911(d)), and any income received as a pension

7 or annuity which arises from an employer-employee

8 relationship, shall be treated as the income of the

9 spouse who rendered the services, and

10 ‘‘(2) income from property shall be divided be11 tween the spouses in accordance with their respec12 tive ownership rights in such property.

13 ‘‘(c) TREATMENT OF DEDUCTIONS.—For purposes of

14 this section—

15 ‘‘(1) except as otherwise provided in this sub16 section, the deductions allowed by section 62(a) shall

17 be allowed to the spouse treated as having the in18 come to which such deductions relate,

19 ‘‘(2) the deduction for retirement savings de20 scribed in paragraph (7) of section 62(a) shall be al21 lowed to the spouse for whose benefit the savings are

22 maintained,

23 ‘‘(3) the deduction for alimony described in

24 paragraph (10) of section 62(a) shall be allowed to

25 the spouse who has the liability to pay the alimony,
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1 ‘‘(4) the deduction referred to in paragraph

2 (16) of section 62(a) (relating to contributions to

3 medical savings accounts) shall be allowed to the

4 spouse with respect to whose employment or self-em5 ployment such account relates,

6 ‘‘(5) the deductions allowable by section 151

7 (relating to personal exemptions) shall be deter8 mined by requiring each spouse to claim 1 personal

9 exemption,

10 ‘‘(6) section 63 shall be applied as if such

11 spouses were not married, and

12 ‘‘(7) each spouse’s share of all other deductions

13 (including the deduction for personal exemptions

14 under section 151(c)) shall be determined by mul15 tiplying the aggregate amount thereof by the frac16 tion—

17 ‘‘(A) the numerator of which is such

18 spouse’s adjusted gross income, and

19 ‘‘(B) the denominator of which is the com20 bined adjusted gross incomes of the 2 spouses.

21 Any fraction determined under paragraph (7) shall be

22 rounded to the nearest percentage point.

23 ‘‘(d) TREATMENT OF CREDITS.—Credits shall be de24 termined (and applied against the joint liability of the cou25 ple for tax) as if the spouses had filed a joint return.
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1 ‘‘(e) TREATMENT AS JOINT RETURN.—Except as

2 otherwise provided in this section or in the regulations

3 prescribed hereunder, for purposes of this title (other than

4 sections 1 and 63(c)) a combined return under this section

5 shall be treated as a joint return.

6 ‘‘(f) REGULATIONS.—The Secretary shall prescribe

7 such regulations as may be necessary or appropriate to

8 carry out this section.’’.

9 (b) UNMARRIED RATE MADE APPLICABLE.—So

10 much of subsection (c) of section 1 as precedes the table

11 is amended to read as follows:

12 ‘‘(c) SEPARATE OR UNMARRIED RETURN RATE.—

13 There is hereby imposed on the taxable income of every

14 individual (other than a married individual (as defined in

15 section 7703) filing a joint return or a separate return,

16 a surviving spouse as defined in section 2(a), or a head

17 of household as defined in section 2(b)) a tax determined

18 in accordance with the following table:’’.

19 (c) BASIC STANDARD DEDUCTION FOR UNMARRIED

20 INDIVIDUALS MADE APPLICABLE.—Subparagraph (C) of

21 section 63(c)(2) is amended to read as follows:

22 ‘‘(C) $3,000 in the case of an individual

23 who is not—

24 ‘‘(i) a married individual filing a joint

25 return or a separate return,
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1 ‘‘(ii) a surviving spouse, or

2 ‘‘(iii) a head of household, or’’.

3 (d) CLERICAL AMENDMENT.—The table of sections

4 for subpart B of part II of subchapter A of chapter 61

5 is amended by inserting after the item relating to section

6 6013 the following:

‘‘Sec. 6013A. Combined return with separate rates.’’.

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

8 this section shall apply to taxable years beginning after

9 December 31, 1998.

10 SEC. 3. INCOME TAXED AT LOWEST RATE INCREASED TO

11 $35,000 FOR UNMARRIED INDIVIDUALS,

12 $40,000 FOR HEADS OF HOUSEHOLDS, AND

13 $50,000 FOR JOINT RETURNS AND SURVIVING

14 SPOUSES.

15 (a) GENERAL RULE.—Section 1 (relating to tax im16 posed) is amended by striking subsections (a) through (e)

17 and inserting the following:

18 ‘‘(a) MARRIED INDIVIDUALS FILING JOINT RETURNS

19 AND SURVIVING SPOUSES.—There is hereby imposed on

20 the taxable income of—

21 ‘‘(1) every married individual (as defined in sec22 tion 7703) who makes a single return jointly with

23 his spouse under section 6013, and

24 ‘‘(2) every surviving spouse (as defined in sec25 tion 2(a)),
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1 a tax determined in accordance with the following table:

‘‘If taxable income is: The tax is:

Not over $50,000 .......................... 15% of taxable income.

Over $50,000 but not over

$109,950.

$7,500, plus 28% of the excess over

$50,000.

Over $109,950 but not over

$155,950.

$24,286, plus 31% of the excess over

$109,950.

Over $155,950 but not over

$278,450.

$38,546, plus 36% of the excess over

$155,950.

Over $278,450 ............................... $82,646, plus 39.6% of the excess

over $278,450.

2 ‘‘(b) HEADS OF HOUSEHOLDS.—There is hereby im3 posed on the taxable income of every head of a household

4 (as defined in section 2(b)) a tax determined in accordance

5 with the following table:

‘‘If taxable income is: The tax is:

Not over $40,000 .......................... 15% of taxable income.

Over $40,000 but not over

$93,750.

$6,000, plus 28% of the excess over

$40,000.

Over $93,750 but not over

$142,000.

$21,050, plus 31% of the excess over

$93,750.

Over $142,000 but not over

$278,450.

$36,007, plus 36% of the excess over

$142,000.

Over $278,450 ............................... $85,129 plus 39.6% of the excess

over $278,450.

6 ‘‘(c) SEPARATE OR UNMARRIED RETURN RATE.—

7 There is hereby imposed on the taxable income of every

8 individual (other than a married individual (as defined in

9 section 7703) filing a joint return or a separate return,

10 a surviving spouse as defined in section 2(a), or a head

11 of household as defined in section 2(b)) a tax determined

12 in accordance with the following table:

‘‘If taxable income is: The tax is:

Not over $35,000 .......................... 15% of taxable income.

Over $35,000 but not over

$71,050.

$5,250, plus 28% of the excess over

$35,000.

Over $71,050 but not over

$128,100.

$15,344, plus 31% of the excess over

$71,050.
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‘‘If taxable income is: The tax is:

Over $128,100 but not over

$278,450.

$33,029, plus 36% of the excess over

$128,100.

Over $278,450 ............................... $87,155, plus 39.6% of the excess

over $278,450.

1 ‘‘(d) MARRIED INDIVIDUALS FILING SEPARATE RE2 TURNS.—There is hereby imposed on the taxable income

3 of every married individual (as defined in section 7703)

4 who does not make a single return jointly with his spouse

5 under section 6013, a tax determined in accordance with

6 the following table:

‘‘If taxable income is: The tax is:

Not over $25,000 .......................... 15% of taxable income.

Over $25,000 but not over

$54,975.

$3,750, plus 28% of the excess over

$25,000.

Over $54,975 but not over

$77,975.

$12,143, plus 31% of the excess over

$54,975.

Over $77,975 but not over

$139,225.

$19,273, plus 36% of the excess over

$77,975.

Over $139,225 ............................... $41,323, plus 39.6% of the excess

over $139,225.

7 ‘‘(e) ESTATES AND TRUSTS.—There is hereby im8 posed on the taxable income of—

9 ‘‘(1) every estate, and

10 ‘‘(2) every trust,

11 taxable under this subsection a tax determined in accord12 ance with the following table:

‘‘If taxable income is: The tax is:

Not over $1,700 ............................ 15% of taxable income.

Over $1,700 but not over $4,000 .. $255, plus 28% of the excess over

$1,700.

Over $4,000 but not over $6,100 .. $899, plus 31% of the excess over

$4,000.

Over $6,100 but not over $8,350 .. $1,550, plus 36% of the excess over

$6,100.

Over $8,350 ................................... $2,360, plus 39.6% of the excess over

$8,350.’’.
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1 (b) INFLATION ADJUSTMENT TO APPLY IN DETER2 MINING RATES FOR 1999.—Subsection (f) of section 1 is

3 amended—

4 (1) by striking ‘‘1993’’ in paragraph (1) and in5 serting ‘‘1998’’,

6 (2) by striking ‘‘1992’’ in paragraph (3)(B) and

7 inserting ‘‘1997’’, and

8 (3) by striking paragraph (7).

9 (c) CONFORMING AMENDMENTS.—

10 (1) The following provisions are each amended

11 by striking ‘‘1992’’ and inserting ‘‘1997’’ each place

12 it appears:

13 (A) Section 25A(h).

14 (B) Section 32(j)(1)(B).

15 (C) Section 41(e)(5)(C).

16 (D) Section 42(h)(6)(G)(i)(II).

17 (E) Section 68(b)(2)(B).

18 (F) Section 135(b)(2)(B)(ii).

19 (G) Section 151(d)(4).

20 (H) Section 221(g)(1)(B).

21 (I) Section 512(d)(2)(B).

22 (J) Section 513(h)(2)(C)(ii).

23 (K) Section 877(a)(2).

24 (L) Section 911(b)(2)(D)(ii)(II).

25 (M) Section 4001(e)(1)(B).
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1 (N) Section 4261(e)(4)(A)(ii).

2 (O) Section 6039F(d).

3 (P) Section 6334(g)(1)(B).

4 (Q) Section 7430(c)(1).

5 (2) Subparagraph (B) of section 59(j)(2) is

6 amended by striking ‘‘, determined by substituting

7 ‘1997’ for ‘1992’ in subparagraph (B) thereof ’’.

8 (3) Subparagraph (B) of section 63(c)(4) is

9 amended by striking ‘‘by substituting for’’ and all

10 that follows and inserting ‘‘by substituting for ‘cal11 endar year 1997’ in subparagraph (B) thereof ‘cal12 endar year 1987’ in the case of the dollar amounts

13 contained in paragraph (2) or (5)(A) or subsection

14 (f).’’.

15 (4) Subparagraph (B) of section 132(f)(6) is

16 amended by inserting before the period ‘‘, deter17 mined by substituting ‘calendar year 1992’ for ‘cal18 endar year 1997’ in subparagraph (B) thereof ’’.

19 (5) Paragraph (2) of section 220(g) is amended

20 by striking ‘‘ by substituting ‘calendar year 1997’

21 for ‘calendar year 1992’ in subparagraph (B) there22 of ’’.

23 (6) Subparagraph (B) of section 685(c)(3) is

24 amended by striking ‘‘, by substituting ‘calendar
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1 year 1997’ for ‘calendar year 1992’ in subparagraph

2 (B) thereof ’’.

3 (7) Subparagraph (B) of section 2032A(a)(3) is

4 amended by striking ‘‘by substituting ‘calendar year

5 1997’ for ‘calendar year 1992’ in subparagraph (B)

6 thereof ’’.

7 (8) Subparagraph (B) of section 2503(b)(2) is

8 amended by striking ‘‘by substituting ‘calendar year

9 1997’ for ‘calendar year 1992’ in subparagraph (B)

10 thereof ’’.

11 (9) Paragraph (2) of section 2631(c) is amend12 ed by striking ‘‘by substituting ‘calendar year 1997’

13 for ‘calendar year 1992’ in subparagraph (B) there14 of ’’.

15 (10) Subparagraph (B) of 6601(j)(3) is amend16 ed by striking ‘‘by substituting ‘calendar year 1997’

17 for ‘calendar year 1992’ in subparagraph (B) there18 of ’’.

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

20 this section shall apply to taxable years beginning after

21 December 31, 1998.

22 SEC. 4. 1-YEAR HOLDING PERIOD FOR ANY LONG-TERM

23 CAPITAL GAIN.

24 (a) IN GENERAL.—Section 1(h)(4) (defining adjusted

25 net capital gain) is amended by adding ‘‘and’’ at the end
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1 of subparagraph (B), by striking ‘‘, and’’ at the end of

2 subparagraph (C) and inserting a period, and by striking

3 subparagraph (D).

4 (b) CONFORMING AMENDMENTS.—Section 1(h) is

5 amended—

6 (1) in paragraph (6), by striking subparagraph

7 (A) and inserting the following:

8 ‘‘(A) IN GENERAL.—The term

9 ‘unrecaptured section 1250 gain’ means the

10 amount of long-term capital gain which would

11 be treated as ordinary income if section

12 1250(b)(1) included all depreciation and the ap13 plicable percentage under section 1250(a) were

14 100 percent.’’,

15 (2) by striking paragraphs (8), (10), and (11),

16 (3) in paragraph (9), by striking ‘‘section 1202

17 gain, or mid-term gain’’ and inserting ‘‘or section

18 1202 gain’’,

19 (4) by redesignating paragraph (9) as para20 graph (8), and

21 (5) by adding at the end the following:

22 ‘‘(8) TREATMENT OF PASS-THRU ENTITIES.—

23 ‘‘(A) IN GENERAL.—The Secretary may

24 prescribe such regulations as are appropriate

25 (including regulations requiring reporting) to
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1 apply this subsection in the case of sales and

2 exchanges by pass-thru entities and of interests

3 in such entities.

4 ‘‘(B) PASS-THRU ENTITY DEFINED.—For

5 purposes of subparagraph (A), the term ‘pass6 thru entity’ means—

7 ‘‘(i) a regulated investment company,

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

9 ‘‘(iii) an S corporation,

10 ‘‘(iv) a partnership,

11 ‘‘(v) an estate or trust, and

12 ‘‘(vi) a common trust fund.’’.

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

14 this section shall apply to taxable years beginning after

15 December 31, 1998.

16 SEC. 5. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF

17 DETERMINING GAIN OR LOSS.

18 (a) IN GENERAL.—Part II of subchapter O of chap19 ter 1 (relating to basis rules of general application) is

20 amended by inserting after section 1021 the following new

21 section:

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

23 OF DETERMINING GAIN OR LOSS.

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

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

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

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

6 the asset shall be substituted for its adjusted basis.

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

8 The deduction for depreciation, depletion, and amor9 tization shall be determined without regard to the

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

11 other person.

12 ‘‘(b) INDEXED ASSET.—

13 ‘‘(1) IN GENERAL.—For purposes of this sec14 tion, the term ‘indexed asset’ means—

15 ‘‘(A) stock in a corporation, and

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

17 therein), which is a capital asset or property

18 used in the trade or business (as defined in sec19 tion 1231(b)).

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

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

22 does not include—

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

24 in property which is in the nature of a credi25 tor’s interest.
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1 ‘‘(B) OPTIONS.—Any option or other right

2 to acquire an interest in property.

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

4 of a lessor, net lease property (within the mean5 ing of subsection (h)(1)).

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

7 which is preferred as to dividends and does not

8 participate in corporate growth to any signifi9 cant extent.

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

11 Stock in—

12 ‘‘(i) an S corporation (within the

13 meaning of section 1361),

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

15 defined in section 542), and

16 ‘‘(iii) a foreign corporation.

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

20 paragraph (2)(E) shall not apply to stock in a for21 eign corporation the stock of which is listed on the

22 New York Stock Exchange, the American Stock Ex23 change, or any domestic regional exchange for which

24 quotations are published on a regular basis other

25 than—
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1 ‘‘(A) stock of a foreign investment com2 pany (within the meaning of section 1246(b)),

3 and

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

5 a United States person who meets the require6 ments of section 1248(a)(2).

7 ‘‘(c) INDEXED BASIS.—For purposes of this sec8 tion—

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

10 any asset is—

11 ‘‘(A) the adjusted basis of the asset, in12 creased by

13 ‘‘(B) the applicable inflation adjustment.

14 ‘‘(2) APPLICABLE INFLATION ADJUSTMENT.—

15 The applicable inflation adjustment for any asset is

16 an amount equal to—

17 ‘‘(A) the adjusted basis of the asset, multi18 plied by

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

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

21 GDP for the last calendar quarter ending

22 before the asset is disposed of, exceeds

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

24 GDP for the last calendar quarter ending
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1 before the asset was acquired by the tax2 payer.

3 The percentage under subparagraph (B) shall be

rounded to the nearest 1 4 ⁄10 of 1 percentage point.

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

6 chain-type price index for GDP for any calendar

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

8 the last revision thereof released by the Secretary of

9 Commerce before the close of the following calendar

10 quarter).

11 ‘‘(d) SPECIAL RULES.—For purposes of this sec12 tion—

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

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

15 a separate asset:

16 ‘‘(A) a substantial improvement to prop17 erty,

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

19 a substantial contribution to capital, and

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

21 extent that separate treatment of such portion

22 is appropriate to carry out the purposes of this

23 section.

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

25 THROUGHOUT HOLDING PERIOD.—
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1 ‘‘(A) IN GENERAL.—The applicable infla2 tion ratio shall be appropriately reduced for cal3 endar months at any time during which the

4 asset was not an indexed asset.

5 ‘‘(B) CERTAIN SHORT SALES.—For pur6 poses of applying subparagraph (A), an asset

7 shall be treated as not an indexed asset for any

8 short sale period during which the taxpayer or

9 the taxpayer’s spouse sells short property sub10 stantially identical to the asset. For purposes of

11 the preceding sentence, the short sale period be12 gins on the day after the substantially identical

13 property is sold and ends on the closing date

14 for the sale.

15 ‘‘(3) TREATMENT OF CERTAIN DISTRIBU16 TIONS.—A distribution with respect to stock in a

17 corporation which is not a dividend shall be treated

18 as a disposition.

19 ‘‘(4) SECTION CANNOT INCREASE ORDINARY

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

21 this section would create or increase a net ordinary

22 loss to which section 1231(a)(2) applies or an ordi23 nary loss to which any other provision of this title

24 applies, such provision shall not apply. The taxpayer

25 shall be treated as having a long-term capital loss in
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1 an amount equal to the amount of the ordinary loss

2 to which the preceding sentence applies.

3 ‘‘(5) ACQUISITION DATE WHERE THERE HAS

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

5 WITH RESPECT TO THE TAXPAYER.—If there has

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

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

8 date of acquisition of such asset by the taxpayer

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

10 most recent such prior application.

11 ‘‘(6) COLLAPSIBLE CORPORATIONS.—The appli12 cation of section 341(a) (relating to collapsible cor13 porations) shall be determined without regard to this

14 section.

15 ‘‘(e) CERTAIN CONDUIT ENTITIES.—

16 ‘‘(1) REGULATED INVESTMENT COMPANIES;

17 REAL ESTATE INVESTMENT TRUSTS; COMMON TRUST

18 FUNDS.—

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

20 investment entity shall be an indexed asset for

21 any calendar month in the same ratio as the

22 fair market value of the assets held by such en23 tity at the close of such month which are in24 dexed assets bears to the fair market value of
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1 all assets of such entity at the close of such

2 month.

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

4 the ratio for any calendar month determined

5 under subparagraph (A) would (but for this

6 subparagraph) be 90 percent or more, such

7 ratio for such month shall be 100 percent.

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

9 the ratio for any calendar month determined

10 under subparagraph (A) would (but for this

11 subparagraph) be 10 percent or less, such ratio

12 for such month shall be zero.

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

14 REAL ESTATE INVESTMENT TRUSTS.—Nothing

15 in this paragraph shall require a real estate in16 vestment trust to value its assets more fre17 quently than once each 36 months (except

18 where such trust ceases to exist). The ratio

19 under subparagraph (A) for any calendar

20 month for which there is no valuation shall be

21 the trustee’s good faith judgment as to such

22 valuation.

23 ‘‘(E) QUALIFIED INVESTMENT ENTITY.—

24 For purposes of this paragraph, the term

25 ‘qualified investment entity’ means—
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1 ‘‘(i) a regulated investment company

2 (within the meaning of section 851),

3 ‘‘(ii) a real estate investment trust

4 (within the meaning of section 856), and

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

6 meaning of section 584).

7 ‘‘(2) PARTNERSHIPS.—In the case of a partner8 ship, the adjustment made under subsection (a) at

9 the partnership level shall be passed through to the

10 partners.

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

12 case of an electing small business corporation, the

13 adjustment under subsection (a) at the corporate

14 level shall be passed through to the shareholders.

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

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

17 to any sale or other disposition of property between

18 related persons except to the extent that the basis

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

20 substituted basis.

21 ‘‘(2) RELATED PERSONS DEFINED.—For pur22 poses of this section, the term ‘related persons’

23 means—

24 ‘‘(A) persons bearing a relationship set

25 forth in section 267(b), and
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1 ‘‘(B) persons treated as single employer

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

3 ‘‘(g) TRANSFERS TO INCREASE INDEXING ADJUST4 MENT OR DEPRECIATION ALLOWANCE.—If any person

5 transfers cash, debt, or any other property to another per6 son and the principal purpose of such transfer is—

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

8 subsection (a), or

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

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

11 depletion, or amortization,

12 the Secretary may disallow part or all of such adjustment

13 or increase.

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

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

16 term ‘net lease property’ means leased real property

17 where—

18 ‘‘(A) the term of the lease (taking into ac19 count options to renew) was 50 percent or more

20 of the useful life of the property, and

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

22 of the deductions with respect to such property

23 which are allowable to the lessor solely by rea24 son of section 162 (other than rents and reim25 bursed amounts with respect to such property)
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1 is 15 percent or less of the rental income pro2 duced by such property.

3 ‘‘(2) STOCK INCLUDES INTEREST IN COMMON

4 TRUST FUND.—The term ‘stock in a corporation’ in5 cludes any interest in a common trust fund (as de6 fined in section 584(a)).

7 ‘‘(i) REGULATIONS.—The Secretary shall prescribe

8 such regulations as may be necessary or appropriate to

9 carry out the purposes of this section.’’.

10 (b) CLERICAL AMENDMENT.—The table of sections

11 for part II of subchapter O of chapter 1 is amended by

12 inserting after the item relating to section 1021 the follow13 ing new item:

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

gain or loss.’’.

14 (c) ADJUSTMENT TO APPLY FOR PURPOSES OF DE15 TERMINING EARNINGS AND PROFITS.—Subsection (f) of

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

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

18 amended by adding at the end thereof the following new

19 paragraph:

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

21 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).’’.

22 (d) EFFECTIVE DATES.—
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1 (1) IN GENERAL.—The amendments made by

2 this section shall apply to the disposition of any

3 property the holding period of which begins after

4 December 31, 1998.

5 (2) CERTAIN TRANSACTIONS BETWEEN RELAT6 ED PERSONS.—The amendments made by this sec7 tion shall not apply to the disposition of any prop8 erty acquired after December 31, 1998, from a re9 lated person (as defined in section 1022(f)(2) of the

10 Internal Revenue Code of 1986, as added by this

11 section) if—

12 (A) such property was so acquired for a

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

14 and

15 (B) the amendments made by this section

16 did not apply to such property in the hands of

17 such related person.

18 SEC. 6. REDUCTION OF TOP ESTATE TAX RATE FROM 55 TO

19 28 PERCENT.

20 (a) IN GENERAL.—Section 2001(c) (relating to impo21 sition and rate of tax) is amended to read as follows:

22 ‘‘(c) RATE SCHEDULE.—

‘‘If the amount with respect

to which the tentative tax

to be computed is:

The tentative tax is:

Not over $10,000 .......................... 18 percent of such amount.

Over $10,000 but not over

$20,000.

$1,800 plus 20 percent of the excess

of such amount over $10,000.
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‘‘If the amount with respect

to which the tentative tax

to be computed is:

The tentative tax is:

Over $20,000 but not over

$40,000.

$3,800 plus 22 percent of the excess

of such amount over $20,000.

Over $40,000 but not over

$60,000.

$8,200 plus 24 percent of the excess

of such amount over $40,000.

Over $60,000 but not over

$80,000.

$13,000 plus 26 percent of the excess

of such amount over $60,000.

Over $80,000 ................................. $18,200 plus 28 percent of the excess

of such amount over $80,000.’’.

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

2 this section shall apply to the estates of decedents dying,

3 and gifts made, after December 31, 1998.

4 SEC. 7. REVENUE EFFECT OF ACT NOT TO EXCEED 50 PER5 CENT OF FEDERAL BUDGET SURPLUS.

6 Not later than 90 days after the date of enactment

7 of this Act, if the Secretary of the Treasury determines

8 that in any of the 4 succeeding fiscal years the amend9 ments made by this Act will result in a reduction of the

10 estimated revenues received in the Treasury for such fiscal

11 year in an amount in excess of 50 percent of the estimated

12 Federal unified budget surplus (if any) for such year (de13 termined without regard to such amendments), the Sec14 retary shall submit to the Committee on Ways and Means

15 of the House of Representatives and the Committee on

16 Finance of the Senate a legislative proposal to appro17 priately modify the provisions of the Internal Revenue

18 Code of 1986 affected by such amendments to eliminate

19 such excess amount. Any legislation enacted for the pur20 pose of achieving the revenue effect of such legislative pro-
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1 posal submitted pursuant to this subsection shall appro2 priately identify such purpose.

Æ