II 

110TH CONGRESS 

2D SESSION S. 3535 

To amend the Internal Revenue Code of 1986 to index certain assets for 

purposes of determining gain or loss. 

IN THE SENATE OF THE UNITED STATES 

SEPTEMBER 22 (legislative day, SEPTEMBER 17), 2008 

Mr. DEMINT introduced the following bill; which was read the first time 

A BILL 

To amend the Internal Revenue Code of 1986 to index 

certain assets for purposes of determining gain or loss. 

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

3 SECTION 1. INDEXING OF CERTAIN ASSETS FOR PURPOSES 

4 OF DETERMINING GAIN OR LOSS. 

5 (a) IN GENERAL.—Part II of subchapter O of chap6 ter 1 of the Internal Revenue Code of 1986 (relating to 

7 basis rules of general application) is amended by redesig8 nating section 1023 as section 1024 and by inserting after 

9 section 1022 the following new section: 


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1 ‘‘SEC. 1023. INDEXING OF CERTAIN ASSETS FOR PURPOSES 

2 OF DETERMINING GAIN OR LOSS. 

3 ‘‘(a) GENERAL RULE.— 

4 ‘‘(1) INDEXED BASIS SUBSTITUTED FOR AD5 JUSTED BASIS.—Solely for purposes of determining 

6 gain or loss on the sale or other disposition by a tax7 payer (other than a corporation) of an indexed asset 

8 which has been held for more than 3 years, the in9 dexed basis of the asset shall be substituted for its 

10 adjusted basis. 

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

12 The deductions for depreciation, depletion, and am13 ortization shall be determined without regard to the 

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

15 other person. 

16 ‘‘(3) WRITTEN DOCUMENTATION REQUIRE17 MENT.—Paragraph (1) shall apply only with respect 

18 to indexed assets for which the taxpayer has written 

19 documentation of the original purchase price paid or 

20 incurred by the taxpayer to acquire such asset. 

21 ‘‘(b) INDEXED ASSET.— 

22 ‘‘(1) IN GENERAL.—For purposes of this sec23 tion, the term ‘indexed asset’ means— 

24 ‘‘(A) common stock in a C corporation 

25 (other than a foreign corporation), or 

26 ‘‘(B) tangible property, 


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

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

3 ‘‘(2) STOCK IN CERTAIN FOREIGN CORPORA4 TIONS INCLUDED.—For purposes of this section— 

5 ‘‘(A) IN GENERAL.—The term ‘indexed 

6 asset’ includes common stock in a foreign cor7 poration which is regularly traded on an estab8 lished securities market. 

9 ‘‘(B) EXCEPTION.—Subparagraph (A) 

10 shall not apply to— 

11 ‘‘(i) stock of a foreign investment 

12 company, 

13 ‘‘(ii) stock in a passive foreign invest14 ment company (as defined in section 

15 1296), 

16 ‘‘(iii) stock in a foreign corporation 

17 held by a United States person who meets 

18 the requirements of section 1248(a)(2), 

19 and 

20 ‘‘(iv) stock in a foreign personal hold21 ing company. 

22 ‘‘(C) TREATMENT OF AMERICAN DEPOSI23 TORY RECEIPTS.—An American depository re24 ceipt for common stock in a foreign corporation 


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1 shall be treated as common stock in such cor2 poration. 

3 ‘‘(c) INDEXED BASIS.—For purposes of this sec4 tion— 

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

6 any asset is— 

7 ‘‘(A) the adjusted basis of the asset, in8 creased by 

9 ‘‘(B) the applicable inflation adjustment. 

10 ‘‘(2) APPLICABLE INFLATION ADJUSTMENT.— 

11 The applicable inflation adjustment for any asset is 

12 an amount equal to— 

13 ‘‘(A) the adjusted basis of the asset, multi14 plied by 

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

16 ‘‘(i) the gross domestic product 

17 deflator for the last calendar quarter end18 ing before the asset is disposed of, exceeds 

19 ‘‘(ii) the gross domestic product 

20 deflator for the last calendar quarter end21 ing before the asset was acquired by the 

22 taxpayer. 

23 The percentage under subparagraph (B) shall be 

rounded to the nearest 1 24 ⁄10 of 1 percentage point. 


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

2 The gross domestic product deflator for any cal3 endar quarter is the implicit price deflator for the 

4 gross domestic product for such quarter (as shown 

5 in the last revision thereof released by the Secretary 

6 of Commerce before the close of the following cal7 endar quarter). 

8 ‘‘(d) SUSPENSION OF HOLDING PERIOD WHERE DI9 MINISHED RISK OF LOSS; TREATMENT OF SHORT

10 SALES.— 

11 ‘‘(1) IN GENERAL.—If the taxpayer (or a re12 lated person) enters into any transaction which sub13 stantially reduces the risk of loss from holding any 

14 asset, such asset shall not be treated as an indexed 

15 asset for the period of such reduced risk. 

16 ‘‘(2) SHORT SALES.— 

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

18 sale of an indexed asset with a short sale period 

19 in excess of 3 years, for purposes of this title, 

20 the amount realized shall be an amount equal 

21 to the amount realized (determined without re22 gard to this paragraph) increased by the appli23 cable inflation adjustment. In applying sub24 section (c)(2) for purposes of the preceding sen25 tence, the date on which the property is sold 


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1 short shall be treated as the date of acquisition 

2 and the closing date for the sale shall be treat3 ed as the date of disposition. 

4 ‘‘(B) SHORT SALE PERIOD.—For purposes 

5 of subparagraph (A), the short sale period be6 gins on the day that the property is sold and 

7 ends on the closing date for the sale. 

8 ‘‘(e) TREATMENT OF REGULATED INVESTMENT

9 COMPANIES AND REAL ESTATE INVESTMENT TRUSTS.— 

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

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

12 provided in this paragraph, the adjustment 

13 under subsection (a) shall be allowed to any 

14 qualified investment entity (including for pur15 poses of determining the earnings and profits of 

16 such entity). 

17 ‘‘(B) EXCEPTION FOR CORPORATE SHARE18 HOLDERS.—Under regulations— 

19 ‘‘(i) in the case of a distribution by a 

20 qualified investment entity (directly or in21 directly) to a corporation— 

22 ‘‘(I) the determination of whether 

23 such distribution is a dividend shall be 

24 made without regard to this section, 

25 and 


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1 ‘‘(II) the amount treated as gain 

2 by reason of the receipt of any capital 

3 gain dividend shall be increased by the 

4 percentage by which the entity’s net 

5 capital gain for the taxable year (de6 termined without regard to this sec7 tion) exceeds the entity’s net capital 

8 gain for such year determined with re9 gard to this section, and 

10 ‘‘(ii) there shall be other appropriate 

11 adjustments (including deemed distribu12 tions) so as to ensure that the benefits of 

13 this section are not allowed (directly or in14 directly) to corporate shareholders of quali15 fied investment entities. 

16 For purposes of the preceding sentence, any 

17 amount includible in gross income under section 

18 852(b)(3)(D) shall be treated as a capital gain 

19 dividend and an S corporation shall not be 

20 treated as a corporation. 

21 ‘‘(C) EXCEPTION FOR QUALIFICATION

22 PURPOSES.—This section shall not apply for 

23 purposes of sections 851(b) and 856(c). 

24 ‘‘(D) EXCEPTION FOR CERTAIN TAXES IM25 POSED AT ENTITY LEVEL.— 


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1 ‘‘(i) TAX ON FAILURE TO DISTRIBUTE

2 ENTIRE GAIN.—If any amount is subject to 

3 tax under section 852(b)(3)(A) for any 

4 taxable year, the amount on which tax is 

5 imposed under such section shall be in6 creased by the percentage determined 

7 under subparagraph (B)(i)(II). A similar 

8 rule shall apply in the case of any amount 

9 subject to tax under paragraph (2) or (3) 

10 of section 857(b) to the extent attributable 

11 to the excess of the net capital gain over 

12 the deduction for dividends paid deter13 mined with reference to capital gain divi14 dends only. The first sentence of this 

15 clause shall not apply to so much of the 

16 amount subject to tax under section 

17 852(b)(3)(A) as is designated by the com18 pany under section 852(b)(3)(D). 

19 ‘‘(ii) OTHER TAXES.—This section 

20 shall not apply for purposes of determining 

21 the amount of any tax imposed by para22 graph (4), (5), or (6) of section 857(b). 

23 ‘‘(2) ADJUSTMENTS TO INTERESTS HELD IN

24 ENTITY.— 


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1 ‘‘(A) REGULATED INVESTMENT COMPA2 NIES.—Stock in a regulated investment com3 pany (within the meaning of section 851) shall 

4 be an indexed asset for any calendar quarter in 

5 the same ratio as— 

6 ‘‘(i) the average of the fair market 

7 values of the indexed assets held by such 

8 company at the close of each month during 

9 such quarter, bears to 

10 ‘‘(ii) the average of the fair market 

11 values of all assets held by such company 

12 at the close of each such month. 

13 ‘‘(B) REAL ESTATE INVESTMENT

14 TRUSTS.—Stock in a real estate investment 

15 trust (within the meaning of section 856) shall 

16 be an indexed asset for any calendar quarter in 

17 the same ratio as— 

18 ‘‘(i) the fair market value of the in19 dexed assets held by such trust at the close 

20 of such quarter, bears to 

21 ‘‘(ii) the fair market value of all as22 sets held by such trust at the close of such 

23 quarter. 

24 ‘‘(C) RATIO OF 80 PERCENT OR MORE.—If 

25 the ratio for any calendar quarter determined 


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1 under subparagraph (A) or (B) would (but for 

2 this subparagraph) be 80 percent or more, such 

3 ratio for such quarter shall be 100 percent. 

4 ‘‘(D) RATIO OF 20 PERCENT OR LESS.—If 

5 the ratio for any calendar quarter determined 

6 under subparagraph (A) or (B) would (but for 

7 this subparagraph) be 20 percent or less, such 

8 ratio for such quarter shall be zero. 

9 ‘‘(E) LOOK-THRU OF PARTNERSHIPS.—For 

10 purposes of this paragraph, a qualified invest11 ment entity which holds a partnership interest 

12 shall be treated (in lieu of holding a partnership 

13 interest) as holding its proportionate share of 

14 the assets held by the partnership. 

15 ‘‘(3) TREATMENT OF RETURN OF CAPITAL DIS16 TRIBUTIONS.—Except as otherwise provided by the 

17 Secretary, a distribution with respect to stock in a 

18 qualified investment entity which is not a dividend 

19 and which results in a reduction in the adjusted 

20 basis of such stock shall be treated as allocable to 

21 stock acquired by the taxpayer in the order in which 

22 such stock was acquired. 

23 ‘‘(4) QUALIFIED INVESTMENT ENTITY.—For 

24 purposes of this subsection, the term ‘qualified in25 vestment entity’ means— 


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1 ‘‘(A) a regulated investment company 

2 (within the meaning of section 851), and 

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

4 the meaning of section 856). 

5 ‘‘(f) OTHER PASS-THRU ENTITIES.— 

6 ‘‘(1) PARTNERSHIPS.— 

7 ‘‘(A) IN GENERAL.—In the case of a part8 nership, the adjustment made under subsection 

9 (a) at the partnership level shall be passed 

10 through to the partners. 

11 ‘‘(B) SPECIAL RULE IN THE CASE OF SEC12 TION 754 ELECTIONS.—In the case of a transfer 

13 of an interest in a partnership with respect to 

14 which the election provided in section 754 is in 

15 effect— 

16 ‘‘(i) the adjustment under section 

17 743(b)(1) shall, with respect to the trans18 feror partner, be treated as a sale of the 

19 partnership assets for purposes of applying 

20 this section, and 

21 ‘‘(ii) with respect to the transferee 

22 partner, the partnership’s holding period 

23 for purposes of this section in such assets 

24 shall be treated as beginning on the date 

25 of such adjustment. 


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

2 corporation, the adjustment made under subsection 

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

4 the shareholders. This section shall not apply for 

5 purposes of determining the amount of any tax im6 posed by section 1374 or 1375. 

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

8 common trust fund, the adjustment made under sub9 section (a) at the trust level shall be passed through 

10 to the participants. 

11 ‘‘(4) INDEXING ADJUSTMENT DISREGARDED IN

12 DETERMINING LOSS ON SALE OF INTEREST IN ENTI13 TY.—Notwithstanding the preceding provisions of 

14 this subsection, for purposes of determining the 

15 amount of any loss on a sale or exchange of an in16 terest in a partnership, S corporation, or common 

17 trust fund, the adjustment made under subsection 

18 (a) shall not be taken into account in determining 

19 the adjusted basis of such interest. 

20 ‘‘(g) DISPOSITIONS BETWEEN RELATED PERSONS.— 

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

22 to any sale or other disposition of property between 

23 related persons except to the extent that the basis 

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

25 substituted basis. 


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1 ‘‘(2) RELATED PERSONS DEFINED.—For pur2 poses of this section, the term ‘related persons’ 

3 means— 

4 ‘‘(A) persons bearing a relationship set 

5 forth in section 267(b), and 

6 ‘‘(B) persons treated as single employer 

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

8 ‘‘(h) TRANSFERS TO INCREASE INDEXING ADJUST9 MENT.—If any person transfers cash, debt, or any other 

10 property to another person and the principal purpose of 

11 such transfer is to secure or increase an adjustment under 

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

13 such adjustment or increase. 

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

15 ‘‘(1) TREATMENT OF IMPROVEMENTS, ETC.—If 

16 there is an addition to the adjusted basis of any tan17 gible property or of any stock in a corporation dur18 ing the taxable year by reason of an improvement to 

19 such property or a contribution to capital of such 

20 corporation— 

21 ‘‘(A) such addition shall never be taken 

22 into account under subsection (c)(1)(A) if the 

23 aggregate amount thereof during the taxable 

24 year with respect to such property or stock is 

25 less than $1,000, and 


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1 ‘‘(B) such addition shall be treated as a 

2 separate asset acquired at the close of such tax3 able year if the aggregate amount thereof dur4 ing the taxable year with respect to such prop5 erty or stock is $1,000 or more. 

6 A rule similar to the rule of the preceding sentence 

7 shall apply to any other portion of an asset to the 

8 extent that separate treatment of such portion is ap9 propriate to carry out the purposes of this section. 

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

11 THROUGHOUT HOLDING PERIOD.—The applicable in12 flation adjustment shall be appropriately reduced for 

13 periods during which the asset was not an indexed 

14 asset. 

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 ‘‘(j) REGULATIONS.—The Secretary shall prescribe 

12 such regulations as may be necessary or appropriate to 

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

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

15 for part II of subchapter O of chapter 1 of the Internal 

16 Revenue Code of 1986 is amended by striking the item 

17 relating to section 1023 and by inserting after the item 

18 relating to section 1022 the following new item: 

‘‘Sec. 1022. Indexing of certain assets for purposes of determining gain or loss. 

‘‘Sec. 1023. Cross references.’’. 

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

20 this section shall apply to sales and other dispositions of 

21 indexed assets after the date of the enactment of this Act, 

22 in taxable years ending after such date. 

Æ 


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