I

104TH CONGRESS

1ST SESSION H. R. 537

To amend the Internal Revenue Code of 1986 to index the basis of certain

assets acquired on or after January 1, 1995, for purposes of determining

gain, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 17, 1995

Mr. MORAN introduced the following bill; which was referred to the Committee

on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to index

the basis of certain assets acquired on or after January

1, 1995, for purposes of determining gain, 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. INDEXING OF CERTAIN ASSETS ACQUIRED ON

4 OR AFTER JANUARY 1, 1995, FOR PURPOSES

5 OF DETERMINING GAIN.

6 (a) IN GENERAL.—Part II of subchapter O of chap7 ter 1 of the Internal Revenue Code of 1986 (relating to
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1 basis rules of general application) is amended by inserting

2 after section 1021 the following new section:

3 ‘‘SEC. 1022. INDEXING OF CERTAIN ASSETS ACQUIRED ON

4 OR AFTER JANUARY 1, 1995, FOR PURPOSES

5 OF DETERMINING GAIN.

6 ‘‘(a) GENERAL RULE.—

7 ‘‘(1) INDEXED BASIS SUBSTITUTED FOR AD8 JUSTED BASIS.—Solely for purposes of determining

9 gain on the sale or other disposition by a taxpayer

10 (other than a corporation) of an indexed asset which

11 has been held for more than 1 year, the indexed

12 basis of the asset shall be substituted for its ad13 justed basis.

14 ‘‘(2) SPECIAL RULE FOR RECAPTURE GAIN.—

15 ‘‘(A) IN GENERAL.—Paragraph (1) shall

16 not apply for purposes of determining the

17 amount of recapture gain on the sale or other

18 disposition of an indexed asset, but the amount

19 of any such recapture gain shall increase the

20 adjusted basis of the asset for purposes of ap21 plying paragraph (1) to determine the amount

22 of other gain on such sale or other disposition.

23 ‘‘(B) RECAPTURE GAIN.—For purposes of

24 subparagraph (A), the term ‘recapture gain’
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1 means any gain treated as ordinary income

2 under section 1245, 1250, or 1254.

3 ‘‘(b) INDEXED ASSET.—

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

6 ‘‘(A) any stock in a corporation, and

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

8 therein),

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

10 or business (as defined in section 1231(b)) and the

11 holding period of which begins on or after January

12 1, 1995.

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) COLLECTIBLES.—Any collectible (as

20 defined in section 408(m)(2) without regard to

21 section 408(m)(3)).

22 ‘‘(C) OPTIONS.—Any option or other right

23 to acquire an interest in property.
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1 ‘‘(D) NET LEASE PROPERTY.—In the case

2 of a lessor, net lease property (within the mean3 ing of subsection (1)(3)).

4 ‘‘(E) STOCK IN FOREIGN CORPORA5 TIONS.—Stock in a foreign corporation.

6 ‘‘(F) STOCK IN S CORPORATIONS.—Stock

7 in an S corporation.

8 ‘‘(3) EXCEPTION FOR STOCK IN FOREIGN COR9 PORATION WHICH IS REGULARLY TRADED ON NA10 TIONAL OR REGIONAL EXCHANGE.—Paragraph

11 (2)(E) shall not apply to stock in a foreign corpora12 tion the stock of which is listed on the New York

13 Stock Exchange, the American Stock Exchange, or

14 any domestic regional exchange for which quotations

15 are published on a regular basis or is authorized for

16 trading on the national market system operated by

17 the National Association of Securities Dealers other

18 than—

19 ‘‘(A) a passive foreign corporation (as de20 fined in section 1296), and

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

22 a United States person who meets the require23 ments of section 1248(a)(2).

24 ‘‘(c) INDEXED BASIS.—For purposes of this sec25 tion—
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1 ‘‘(1) INDEXED BASIS.—The indexed basis for

2 any asset is—

3 ‘‘(A) the adjusted basis of the asset, multi4 plied by

5 ‘‘(B) the applicable inflation ratio.

6 ‘‘(2) APPLICABLE INFLATION RATIO.—The ap7 plicable inflation ratio for any asset shall be deter8 mined by dividing—

9 ‘‘(A) The CPI for the calendar year pre10 ceding the calendar year in which the disposi11 tion takes place, by

12 ‘‘(B) the CPI for the calendar year preced13 ing the calendar year in which the taxpayer’s

14 holding period for such asset began.

15 The applicable inflation ratio shall not be taken into

16 account unless it is greater than 1. The applicable

17 inflation ratio for any asset shall be rounded to the

18 nearest one-thousandth.

19 ‘‘(3) CONVENTIONS.—For purposes of para20 graph (2), if any asset is disposed of during any cal21 endar year—

22 ‘‘(A) such disposition shall be treated as

23 occurring on the last day of such calendar year,

24 and
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1 ‘‘(B) the taxpayer’s holding period for such

2 asset shall be treated as beginning in the same

3 calendar year as would be determined for an

4 asset actually disposed of on such last day with

5 a holding period of the same length as the ac6 tual holding period of the asset involved.

7 ‘‘(4) CPI.—For purposes of this subsection, the

8 CPI for any calendar year shall be determined under

9 section 1(f)(4).

10 ‘‘(d) SHORT SALES.—

11 ‘‘(1) IN GENERAL.—In the case of a short sale

12 of an indexed asset with a short sale period in excess

13 of 1 year, for purposes of this title, the amount real14 ized shall be an amount equal to the amount realized

15 (determined without regard to this paragraph) mul16 tiplied by the applicable inflation ratio. In applying

17 subsection (c)(2) for purposes of the preceding sen18 tence, the date on which the property is sold short

19 shall be treated as the date on which the holding pe20 riod for the asset begins and the closing date for the

21 sale shall be treated as the date of disposition.

22 ‘‘(2) SHORT SALE OF SUBSTANTIALLY IDEN23 TICAL PROPERTY.—If the taxpayer or the taxpayer’s

24 spouse sells short property substantially identical to

25 an asset held by the taxpayer, the asset held by the
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1 taxpayer and the substantially identical property

2 shall not be treated as indexed assets for the short

3 sale period.

4 ‘‘(3) SHORT SALE PERIOD.—For purposes of

5 this subsection, the short sale period begins on the

6 day after property is sold and ends on the closing

7 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 deter6 mined without regard to this section

7 exceeds the entity’s net capital gain

8 for such year determined with regard

9 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) IN GENERAL.—Stock in a qualified

2 investment entity shall be an indexed asset for

3 any calendar month in the same ratio as the

4 fair market value of the assets held by such en5 tity at the close of such month which are in6 dexed assets (determined without regard to the

7 requirement that the holding period begin on or

8 after January 1, 1995) bears to the fair market

9 value of all assets of such entity at the close of

10 such month.

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

12 the ratio for any calendar month determined

13 under subparagraph (A) would (but for this

14 subparagraph) be 90 percent or more, such

15 ratio for such month shall be 100 percent.

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

17 the ratio for any calendar month determined

18 under subparagraph (A) would (but for this

19 subparagraph) be 10 percent or less, such ratio

20 for such month shall be zero.

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

22 REAL ESTATE INVESTMENT TRUSTS.—Nothing

23 in this paragraph shall require a real estate in24 vestment trust to value its assets more fre25 quently than once each 36 months (except
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1 where such trust ceases to exist). The ratio

2 under subparagraph (A) for any calendar

3 month for which there is no valuation shall be

4 the trustee’s good faith judgment as to such

5 valuation.

6 ‘‘(3) QUALIFIED INVESTMENT ENTITY.—For

7 purposes of this subsection, the term ‘qualified in8 vestment entity’ means—

9 ‘‘(A) a regulated investment company

10 (within the meaning of section 851), and

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

12 the meaning of section 856).

13 ‘‘(f) OTHER PASS-THRU ENTITIES.—

14 ‘‘(1) PARTNERSHIPS.—In the case of a partner15 ship, the adjustment made under subsection (a) at

16 the partnership level shall be passed through to the

17 partners (but only for purposes of determining the

18 income of partners who are not corporations).

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

20 corporation, the adjustment made under subsection

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

22 the shareholders. This section shall not apply for

23 purposes of determining the amount of any tax im24 posed by section 1374 or 1375.
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1 ‘‘(3) COMMON TRUST FUNDS.—In the case of a

2 common trust fund, the adjustment made under sub3 section (a) at the trust level shall be passed through

4 to the participants (but only for purposes of deter5 mining the income of participants who are not cor6 porations).

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

8 This section shall not apply to any sale or other disposition

9 of property between related persons (within the meaning

10 of section 465(b)(3)(C)) if such property, in the hands of

11 the transferee, is of a character subject to the allowance

12 for depreciation provided in section 167.

13 ‘‘(h) TRANSFERS TO INCREASE INDEXING ADJUST14 MENT.—If any person transfers cash, debt, or any other

15 property to another person and the principal purpose of

16 such transfer is to secure or increase an adjustment under

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

18 such adjustment or increase.

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

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

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

22 a separate asset:

23 ‘‘(A) A substantial improvement to prop24 erty.
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1 ‘‘(B) In the case of stock of a corporation,

2 a substantial contribution to capital.

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

4 extent that separate treatment of such portion

5 is appropriate to carry out the purposes of this

6 section.

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

8 THROUGHOUT HOLDING PERIOD.—The applicable in9 flation ratio shall be appropriately reduced for peri10 ods during which the asset was not an indexed asset.

11 ‘‘(3) NET LEASE PROPERTY DEFINED.—The

12 term ‘net lease property’ means leased property

13 where—

14 ‘‘(A) the term of the lease (taking into ac15 count options to renew) was 50 percent or more

16 of the useful life of the property, and

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

18 of the deductions with respect to such property

19 which are allowable to the lessor solely by rea20 son of section 162 (other than rents and reim21 bursed amounts with respect to such property)

22 is 15 percent or less of the rental income pro23 duced by such property.
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1 ‘‘(j) 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) GAINS AND LOSSES FROM INDEXED ASSETS NOT

5 TAKEN INTO ACCOUNT UNDER LIMITATION ON INVEST6 MENT INTEREST.—Subparagraph (B) of section

7 163(d)(4) of such Code (defining investment income) is

8 amended by adding at the end thereof the following new

9 sentences: ‘‘Gain from the sale or other disposition of an

10 indexed asset (as defined in section 1022) held for more

11 than 1 year shall not be taken into account for purposes

12 of the preceding sentence. The preceding sentence shall

13 not apply to gain from the sale or other disposition of any

14 such asset if the taxpayer elects to waive the benefits of

15 section 1022 in determining the amount of such gain.’’

16 (c) RECAPTURE OF ENTIRE AMOUNT OF DEPRECIA17 TION UNDER SECTION 1250.—Section 1250 of such Code

18 (relating to gain from dispositions of certain depreciable

19 realty) is amended by adding at the end thereof the follow20 ing new subsection:

21 ‘‘(i) RECAPTURE OF ENTIRE AMOUNT OF DEPRECIA22 TION IN CASE OF PROPERTY TO WHICH SECTION 1022

23 APPLIES.—

24 ‘‘(1) IN GENERAL.—In the case of any taxpayer

25 other than a corporation—
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1 ‘‘(A) subsection (a) shall be applied with

2 respect to any disposition of section 1250 prop3 erty to which section 1022 applies as if it read

4 as follows:

5 ‘‘ ‘(a) GENERAL RULE.—Except as otherwise pro6 vided in this section, if section 1250 property is disposed

7 of, the lesser of—

8 ‘‘ ‘(1) the depreciation adjustments in respect of

9 such property, or

10 ‘‘ ‘(2) the excess of—

11 ‘‘ ‘(A) the amount realized (or, in the case

12 of a disposition other than sale, exchange, or in13 voluntary conversion, the fair market value of

14 such property), over

15 ‘‘ ‘(B) the adjusted basis of such property,

16 shall be treated as gain which is ordinary income. Such

17 gain shall be recognized notwithstanding any other provi18 sion of this subtitle.’, and

19 ‘‘(B) in the case of any disposition de20 scribed in subparagraph (A), subsections (e)

21 and (f) shall not apply and appropriate adjust22 ments shall be made in the provisions of sub23 section (d).
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1 ‘‘(2) SPECIAL RULES FOR CERTAIN ENTITIES.—

2 For purposes of paragraph (1), the following shall

3 not be treated as a corporation:

4 ‘‘(A) An S corporation.

5 ‘‘(B) A regulated investment company.

6 ‘‘(C) A real estate investment trust.

7 ‘‘(3) COORDINATION WITH SECTION 453(i).—

8 Subsection (i) of section 453 shall be applied with9 out regard to this subsection.’’.

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

11 for part II of subchapter O of chapter 1 of such Code

12 is amended by inserting after the item relating to section

13 1021 the following new item:

‘‘Sec. 1022. Indexing of certain assets acquired on or after January 1, 1995, for purposes of determining gain.’’.

14 (e) EFFECTIVE DATE.—

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

16 this section shall apply to the disposition of any

17 property the holding period of which begins on or

18 after January 1, 1995.

19 (2) CERTAIN TRANSACTIONS BETWEEN RELAT20 ED PERSONS.—The amendments made by this sec21 tion shall not apply to the disposition of any prop22 erty acquired on or after January 1, 1995, from a

23 related person (as defined in section 465(b)(3)(C) of

24 the Internal Revenue Code of 1986) if—
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1 (A) such property was so acquired for a

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

3 and

4 (B) the amendments made by this section

5 did not apply to such property in the hands of

6 such related person.

7 (f) ELECTION TO RECOGNIZE GAIN ON READILY

8 TRADABLE SECURITIES HELD ON JANUARY 1, 1995.—

9 (1) IN GENERAL.—If a taxpayer other than a

10 corporation holds any readily tradable security on

11 January 1, 1995, the taxpayer may elect to treat

12 such security as having been sold on the last busi13 ness day before such date for an amount equal to its

14 closing market price on such last business day (and

15 as having been reacquired on such last business day

16 for an amount equal to such closing market price).

17 (2) TREATMENT OF GAIN OR LOSS.—

18 (A) Any gain resulting from an election

19 under paragraph (1) shall be treated as received

20 or accrued on the last business day referred to

21 in paragraph (1).

22 (B) Any loss resulting from an election

23 under paragraph (1) shall not be allowed for

24 any taxable year.
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1 (3) ELECTION.—An election under paragraph

2 (1) shall be made in such manner as the Secretary

3 may prescribe and shall specify the readily tradable

4 securities for which such election is made. Such an

5 election, once made with respect to any readily

6 tradable security, shall be irrevocable.

7 (4) READILY TRADABLE SECURITY.—For pur8 poses of this subsection, the term ‘‘readily tradable

9 security’’ means any stock or other security which,

10 as of January 1, 1995, is readily tradable on an es11 tablished securities market or otherwise.

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