I

104TH CONGRESS

1ST SESSION H. R. 56

To amend the Internal Revenue Code of 1986 to provide all taxpayers with

a 50 percent deduction for capital gains, to index the basis of certain

capital assets, and to allow the capital loss deduction for losses on

the sale or exchange of an individual’s principal residence.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 4, 1995

Mr. ARCHER (for himself, Mr. ZIMMER, Mr. CRANE, Mr. THOMAS, Mr. SHAW,

Mrs. JOHNSON of Connecticut, Mr. BUNNING of Kentucky, Mr. HOUGHTON, Mr. HERGER, Mr. MCCRERY, Mr. HANCOCK, Mr. CAMP, Mr.

RAMSTAD, Mr. NUSSLE, Mr. SAM JOHNSON of Texas, Ms. DUNN of

Washington, Mr. COLLINS of Georgia, Mr. PORTMAN, Mr. ENGLISH of

Pennsylvania, Mr. ENSIGN, Mr. CHRISTENSEN, Mr. BLILEY, Mr. EMERSON, Mr. GREENWOOD, Mr. CANADY, Mr. LATHAM, Mr. BURTON of Indiana, Mrs. MEYERS of Kansas, Mr. SAXTON, Mr. MCINTOSH, Mr. ROYCE,

Mr. LIVINGSTON, Mr. FRISA, Mr. STUMP, Mr. TAYLOR of North Carolina, Mr. BARTLETT of Maryland, Mr. HUTCHINSON, Mr. BAKER of California, Mr. CUNNINGHAM, Mr. QUILLEN, Mr. ALLARD, Mr. SMITH of

Texas, Mr. ROHRABACHER, Mr. BACHUS, Ms. PRYCE, Mr. BLUTE, Mr.

FORBES, Mr. GALLEGLY, Mr. DORNAN, Mr. COX, and Mr. LEACH) 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 provide

all taxpayers with a 50 percent deduction for capital

gains, to index the basis of certain capital assets, and

to allow the capital loss deduction for losses on the

sale or exchange of an individual’s principal residence.
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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.

4 This Act may be cited as the ‘‘Capital Formation and

5 Jobs Creation Act of 1995’’.

6 SEC. 2. 50 PERCENT CAPITAL GAINS DEDUCTION.

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

8 chapter 1 of the Internal Revenue Code of 1986 (relating

9 to treatment of capital gains) is amended to read as

10 follows:

11 ‘‘PART I—TREATMENT OF CAPITAL GAINS

‘‘Sec. 1201. Capital gains deduction.

12 ‘‘SEC. 1201. CAPITAL GAINS DEDUCTION.

13 ‘‘(a) GENERAL RULE.—If for any taxable year a tax14 payer has a net capital gain, 50 percent of such gain shall

15 be a deduction from gross income.

16 ‘‘(b) ESTATES AND TRUSTS.—In the case of an es17 tate or trust, the deduction shall be computed by excluding

18 the portion (if any) of the gains for the taxable year from

19 sales or exchanges of capital assets which, under sections

20 652 and 662 (relating to inclusions of amounts in gross

21 income of beneficiaries of trusts), is includible by the in22 come beneficiaries as gain derived from the sale or ex23 change of capital assets.
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1 ‘‘(c) COORDINATION WITH TREATMENT OF CAPITAL

2 GAIN UNDER LIMITATION ON INVESTMENT INTEREST.—

3 For purposes of this section, the net capital gain for any

4 taxable year shall be reduced (but not below zero) by the

5 amount which the taxpayer takes into account as invest6 ment income under section 163(d)(4)(B)(iii).

7 ‘‘(d) TRANSITIONAL RULE.—

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

9 year which includes January 1, 1995—

10 ‘‘(A) the amount taken into account as the

11 net capital gain under subsection (a) shall not

12 exceed the net capital gain determined by only

13 taking into account gains and losses properly

14 taken into account for the portion of the tax15 able year on or after January 1, 1995, and

16 ‘‘(B) if the net capital gain for such year

17 exceeds the amount taken into account under

18 subsection (a), the rate of tax imposed by sec19 tion 1 on such excess shall not exceed 28 per20 cent.

21 ‘‘(2) SPECIAL RULES FOR PASS-THRU ENTI22 TIES.—

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

24 (1) with respect to any pass-thru entity, the de25 termination of when gains and losses are prop-
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1 erly taken into account shall be made at the en2 tity level.

3 ‘‘(B) PASS-THRU ENTITY DEFINED.—For

4 purposes of subparagraph (A), the term ‘pass5 thru entity’ means—

6 ‘‘(i) a regulated investment company,

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

8 ‘‘(iii) an S corporation,

9 ‘‘(iv) a partnership,

10 ‘‘(v) an estate or trust, and

11 ‘‘(vi) a common trust fund.’’

12 (b) DEDUCTION ALLOWABLE IN COMPUTING AD13 JUSTED GROSS INCOME.—Subsection (a) of section 62 of

14 such Code is amended by inserting after paragraph (15)

15 the following new paragraph:

16 ‘‘(16) LONG-TERM CAPITAL GAINS.—The de17 duction allowed by section 1201.’’

18 (c) TECHNICAL AND CONFORMING CHANGES.—

19 (1) Section 13113 of the Revenue Reconcili20 ation Act of 1993 (relating to 50-percent exclusion

21 for gain from certain small business stock), and the

22 amendments made by such section, are hereby re23 pealed; and the Internal Revenue Code of 1986 shall

24 be applied as if such section (and amendments) had

25 never been enacted.
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1 (2) Section 1 of such Code is amended by strik2 ing subsection (h).

3 (3) Paragraph (1) of section 170(e) of such

4 Code is amended by striking ‘‘the amount of gain’’

5 in the material following subparagraph (B)(ii) and

6 inserting ‘‘50 percent of the amount of gain’’.

7 (4)(A) Paragraph (2) of section 172(d) of such

8 Code is amended to read as follows:

9 ‘‘(2) CAPITAL GAINS AND LOSSES.—

10 ‘‘(A) LOSSES OF TAXPAYERS OTHER THAN

11 CORPORATIONS.—In the case of a taxpayer

12 other than a corporation, the amount deductible

13 on account of losses from sales or exchanges of

14 capital assets shall not exceed the amount in15 cludible on account of gains from sales or ex16 changes of capital assets.

17 ‘‘(B) DEDUCTION UNDER SECTION 1201.—

18 The deduction under section 1201 shall not be

19 allowed.’’

20 (B) Subparagraph (B) of section 172(d)(4) of

21 such Code is amended by striking ‘‘paragraphs (1)

22 and (3)’’ and inserting ‘‘paragraphs (1), (2)(B), and

23 (3)’’.

24 (5) Paragraph (4) of section 642(c) of such

25 Code is amended to read as follows:
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1 ‘‘(4) ADJUSTMENTS.—To the extent that the

2 amount otherwise allowable as a deduction under

3 this subsection consists of gain from the sale or ex4 change of capital assets held for more than 1 year,

5 proper adjustment shall be made for any deduction

6 allowable to the estate or trust under section 1201

7 (relating to deduction for excess of capital gains over

8 capital losses). In the case of a trust, the deduction

9 allowed by this subsection shall be subject to section

10 681 (relating to unrelated business income).’’

11 (6) Paragraph (3) of section 643(a) of such

12 Code is amended by adding at the end thereof the

13 following new sentence: ‘‘The deduction under sec14 tion 1201 (relating to deduction of excess of capital

15 gains over capital losses) shall not be taken into

16 account.’’

17 (7) Paragraph (4) of section 691(c) of such

18 Code is amended by striking ‘‘sections 1(h), 1201,

19 and 1211’’ and inserting ‘‘sections 1201 and 1211’’.

20 (8) The second sentence of section 871(a)(2) of

21 such Code is amended by inserting ‘‘such gains and

22 losses shall be determined without regard to section

23 1201 (relating to deduction for capital gains) and’’

24 after ‘‘except that’’.
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1 (9) Subsection (d) of section 1044 of such Code

2 is amended by striking the last sentence.

3 (10)(A) Paragraph (2) of section 1211(b) of

4 such Code is amended to read as follows:

5 ‘‘(2) the sum of—

6 ‘‘(A) the excess of the net short-term cap7 ital loss over the net long-term capital gain, and

8 ‘‘(B) one-half of the excess of the net long9 term capital loss over the net short-term capital

10 gain.’’

11 (B) So much of paragraph (2) of section

12 1212(b) of such Code as precedes subparagraph (B)

13 thereof is amended to read as follows:

14 ‘‘(2) SPECIAL RULES.—

15 ‘‘(A) ADJUSTMENTS.—

16 ‘‘(i) For purposes of determining the

17 excess referred to in paragraph (1)(A),

18 there shall be treated as short-term capital

19 gain in the taxable year an amount equal

20 to the lesser of—

21 ‘‘(I) the amount allowed for the

22 taxable year under paragraph (1) or

23 (2) of section 1211(b), or

24 ‘‘(II) the adjusted taxable income

25 for such taxable year.
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1 ‘‘(ii) For purposes of determining the

2 excess referred to in paragraph (1)(B),

3 there shall be treated as short-term capital

4 gain in the taxable year an amount equal

5 to the sum of—

6 ‘‘(I) the amount allowed for the

7 taxable year under paragraph (1) or

8 (2) of section 1211(b) or the adjusted

9 taxable income for such taxable year,

10 whichever is the least, plus

11 ‘‘(II) the excess of the amount

12 described in subclause (I) over the net

13 short-term capital loss (determined

14 without regard to this subsection) for

15 such year.’’

16 (11) Paragraph (1) of section 1402(i) of such

17 Code is amended by inserting ‘‘, and the deduction

18 provided by section 1201 shall not apply’’ before the

19 period at the end thereof.

20 (12) Section 12 of such Code is amended by

21 striking paragraph (4) and redesignating the follow22 ing paragraphs accordingly.

23 (13) Paragraph (2) of section 527(b) of such

24 Code is hereby repealed.
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1 (14) Subparagraph (D) of section 593(b)(2) of

2 such Code is amended by adding ‘‘and’’ at the end

3 of clause (iii), by striking ‘‘, and’’ at the end of

4 clause (iv) and inserting a period, and by striking

5 clause (v).

6 (15) Paragraph (2) of section 801(a) of such

7 Code is hereby repealed.

8 (16) Subsection (c) of section 831 of such Code

9 is amended by striking paragraph (1) and redesig10 nating the following paragraphs accordingly.

11 (17)(A) Subparagraph (A) of section 852(b)(3)

12 of such Code is amended by striking ‘‘, determined

13 as provided in section 1201(a), on’’ and inserting

14 ‘‘of 17.5 percent of’’.

15 (B) Clause (iii) of section 852(b)(3)(D) of such

16 Code is amended—

17 (i) by striking ‘‘65 percent’’ and inserting

18 ‘‘82.5 percent’’, and

19 (ii) by striking ‘‘section 1201(a)’’ and in20 serting ‘‘subparagraph (A)’’.

21 (18) Clause (ii) of section 857(b)(3)(A) of such

22 Code is amended by striking ‘‘determined at the rate

23 provided in section 1201(a) on’’ and inserting ‘‘of

24 17.5 percent of’’.
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1 (19) Paragraph (1) of section 882(a) of such

2 Code is amended by striking ‘‘section 11, 55, 59A,

3 or 1201(a)’’ and inserting ‘‘section 11, 55, or 59A’’.

4 (20) Subsection (b) of section 904 of such Code

5 is amended by striking paragraphs (2)(B), (3)(B),

6 (3)(D), and (3)(E).

7 (21) Subsection (b) of section 1374 of such

8 Code is amended by striking paragraph (4).

9 (22) Subsection (b) of section 1381 is amended

10 by striking ‘‘or 1201’’.

11 (23) Subsection (e) of section 1445 of such

12 Code is amended—

13 (A) in paragraph (1) by striking ‘‘35 per14 cent (or, to the extent provided in regulations,

15 28 percent)’’ and inserting ‘‘17.5 percent (or, to

16 the extent provided in regulations, 19.8 per17 cent)’’, and

18 (B) in paragraph (2) by striking ‘‘35 per19 cent’’ and inserting ‘‘17.5 percent’’.

20 (24) Clause (i) of section 6425(c)(1)(A) of such

21 Code is amended by striking ‘‘or 1201(a)’’.

22 (25) Clause (i) of section 6655(g)(1)(A) of such

23 Code is amended by striking ‘‘or 1201(a)’’.

24 (26)(A) The second sentence of section

25 7518(g)(6)(A) of such Code is amended—
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1 (i) by striking ‘‘during a taxable year to

2 which section 1(h) or 1201(a) applies’’, and

3 (ii) by striking ‘‘28 percent (34 percent’’

4 and inserting ‘‘19.8 percent (17.5 percent’’.

5 (B) The second sentence of section

6 607(h)(6)(A) of the Merchant Marine Act, 1936 is

7 amended—

8 (i) by striking ‘‘during a taxable year to

9 which section 1(h) or 1201(a) of such Code ap10 plies’’, and

11 (ii) by striking ‘‘28 percent (34 percent’’

12 and inserting ‘‘19.8 percent (17.5 percent’’.

13 (d) EFFECTIVE DATE.—

14 (1) IN GENERAL.—Except as otherwise pro15 vided in this subsection, the amendments made by

16 this section shall apply to taxable years ending after

17 December 31, 1994.

18 (2) CONTRIBUTIONS.—The amendment made

19 by subsection (c)(3) shall apply only to contributions

20 on or after January 1, 1995.

21 (3) WITHHOLDING.—The amendment made by

22 subsection (c)(23) shall apply only to amounts paid

23 after the date of the enactment of this Act.
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1 SEC. 3. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF

2 DETERMINING GAIN OR LOSS.

3 (a) IN GENERAL.—Part II of subchapter O of chap4 ter 1 of the Internal Revenue Code of 1986 (relating to

5 basis rules of general application) is amended by inserting

6 after section 1021 the following new section:

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

8 OF DETERMINING GAIN OR LOSS.

9 ‘‘(a) GENERAL RULE.—

10 ‘‘(1) INDEXED BASIS SUBSTITUTED FOR AD11 JUSTED BASIS.—Except as otherwise provided in

12 this subsection, if an indexed asset which has been

13 held for more than 1 year is sold or otherwise dis14 posed of, for purposes of this title the indexed basis

15 of the asset shall be substituted for its adjusted

16 basis.

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

18 The deduction for depreciation, depletion, and amor19 tization shall be determined without regard to the

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

21 other person.

22 ‘‘(b) INDEXED ASSET.—

23 ‘‘(1) IN GENERAL.—For purposes of this sec24 tion, the term ‘indexed asset’ means—

25 ‘‘(A) stock in a corporation, and
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1 ‘‘(B) tangible property (or any interest

2 therein),

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

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

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

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

7 does not include—

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

9 in property which is in the nature of a credi10 tor’s interest.

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

12 to acquire an interest in property.

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

14 of a lessor, net lease property (within the mean15 ing of subsection (i)(3)).

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

17 which is fixed and preferred as to dividends and

18 does not participate in corporate growth to any

19 significant extent.

20 ‘‘(E) STOCK IN FOREIGN CORPORA21 TIONS.—Stock in a foreign corporation.

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

23 in an S corporation.

24 ‘‘(3) EXCEPTION FOR STOCK IN FOREIGN COR25 PORATION WHICH IS REGULARLY TRADED ON NA-
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1 TIONAL OR REGIONAL EXCHANGE.—Paragraph

2 (2)(E) shall not apply to stock in a foreign corpora3 tion the stock of which is listed on the New York

4 Stock Exchange, the American Stock Exchange, the

5 national market system operated by the National As6 sociation of Securities Dealers, or any domestic re7 gional exchange for which quotations are published

8 on a regular basis other than—

9 ‘‘(A) stock of a foreign investment com10 pany (within the meaning of section 1246(b)),

11 ‘‘(B) stock in a passive foreign investment

12 company (as defined in section 1296), and

13 ‘‘(C) stock in a foreign corporation held by

14 a United States person who meets the require15 ments of section 1248(a)(2).

16 ‘‘(4) TREATMENT OF AMERICAN DEPOSITORY

17 RECEIPTS.—For purposes of this section, an Amer18 ican depository receipt for stock in a foreign cor19 poration shall be treated as stock in such corpora20 tion.

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, multi2 plied by

3 ‘‘(B) the applicable inflation ratio.

4 ‘‘(2) APPLICABLE INFLATION RATIO.—The ap5 plicable inflation ratio for any asset is the percent6 age arrived at by dividing—

7 ‘‘(A) the gross domestic product deflator

8 for the calendar quarter in which the disposi9 tion takes place, by

10 ‘‘(B) the gross domestic product deflator

11 for the calendar quarter in which the asset was

12 acquired by the taxpayer (or, if later, the cal13 endar quarter ending on December 31, 1994).

14 The applicable inflation ratio shall never be less than

15 1. The applicable inflation ratio for any asset shall

be rounded to the nearest 1 16 ⁄1000.

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

18 The gross domestic product deflator for any cal19 endar quarter is the implicit price deflator for the

20 gross domestic product for such quarter (as shown

21 in the first revision thereof).

22 ‘‘(d) SHORT SALES.—

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

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

25 of 1 year, for purposes of this title, the amount real-
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1 ized shall be an amount equal to the amount realized

2 (determined without regard to this paragraph) mul3 tiplied by the applicable inflation ratio. In applying

4 subsection (c)(2) for purposes of the preceding sen5 tence, the date on which the property is sold short

6 shall be treated as the date of acquisition and the

7 closing date for the sale shall be treated as the date

8 of disposition.

9 ‘‘(2) SHORT SALE OF SUBSTANTIALLY IDEN10 TICAL PROPERTY.—If the taxpayer or the taxpayer’s

11 spouse sells short property substantially identical to

12 an asset held by the taxpayer, the asset held by the

13 taxpayer and the substantially identical property

14 shall not be treated as indexed assets for the short

15 sale period.

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

17 this subsection, the short sale period begins on the

18 day after property is sold and ends on the closing

19 date for the sale.

20 ‘‘(e) TREATMENT OF REGULATED INVESTMENT

21 COMPANIES AND REAL ESTATE INVESTMENT TRUSTS.—

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

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

24 provided in this paragraph, the adjustment

25 under subsection (a) shall be allowed to any
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1 qualified investment entity (including for pur2 poses of determining the earnings and profits of

3 such entity).

4 ‘‘(B) EXCEPTION FOR QUALIFICATION

5 PURPOSES.—This section shall not apply for

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

7 ‘‘(2) ADJUSTMENTS TO INTERESTS HELD IN

8 ENTITY.—

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 ‘‘(3) QUALIFIED INVESTMENT ENTITY.—For

14 purposes of this subsection, the term ‘qualified in15 vestment entity’ means—

16 ‘‘(A) a regulated investment company

17 (within the meaning of section 851), and

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

19 the meaning of section 856).

20 ‘‘(f) OTHER PASS-THRU ENTITIES.—

21 ‘‘(1) PARTNERSHIPS.—In the case of a partner22 ship, the adjustment made under subsection (a) at

23 the partnership level shall be passed through to the

24 partners.
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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.

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

6 common trust fund, the adjustment made under sub7 section (a) at the trust level shall be passed through

8 to the participants.

9 ‘‘(g) 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 ‘‘(h) TRANSFERS TO INCREASE INDEXING ADJUST23 MENT.—If any person transfers cash, debt, or any other

24 property to another person and the principal purpose of

25 such transfer is to secure or increase an adjustment under
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1 subsection (a), the Secretary may disallow part or all of

2 such adjustment or increase.

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

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

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

6 a separate asset:

7 ‘‘(A) A substantial improvement to prop8 erty.

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

10 a substantial contribution to capital.

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

12 extent that separate treatment of such portion

13 is appropriate to carry out the purposes of this

14 section.

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

16 THROUGHOUT HOLDING PERIOD.—The applicable in17 flation ratio shall be appropriately reduced for peri18 ods during which the asset was not an indexed asset.

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

20 term ‘net lease property’ means leased property

21 where—

22 ‘‘(A) the term of the lease (taking into ac23 count options to renew) was 50 percent or more

24 of the useful life of the property, and
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1 ‘‘(B) for the period of the lease, the sum

2 of the deductions with respect to such property

3 which are allowable to the lessor solely by rea4 son of section 162 (other than rents and reim5 bursed amounts with respect to such property)

6 is 15 percent or less of the rental income pro7 duced by such property.

8 ‘‘(4) 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 ‘‘(5) 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 ‘‘(6) 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 ‘‘(7) COLLAPSIBLE CORPORATIONS.—The appli5 cation of section 341(a) (relating to collapsible cor6 porations) shall be determined without regard to this

7 section.

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

9 such regulations as may be necessary or appropriate to

10 carry out the purposes of this section.’’

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

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

13 is amended by inserting after the item relating to section

14 1021 the following new item:

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

gain or loss.’’

15 (c) ADJUSTMENT TO APPLY FOR PURPOSES OF DE16 TERMINING EARNINGS AND PROFITS.—Subsection (f) of

17 section 312 of such Code (relating to effect on earnings

18 and profits of gain or loss and of receipt of tax-free dis19 tributions) is amended by adding at the end thereof the

20 following new paragraph:
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1 ‘‘(3) EFFECT ON EARNINGS AND PROFITS OF

2 INDEXED BASIS.—

For substitution of indexed basis for adjusted

basis in the case of the disposition of certain assets,

see section 1022(a)(1).’’

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

4 this section shall apply to dispositions after December 31,

5 1994, in taxable years ending after such date.

6 SEC. 4. CAPITAL LOSS DEDUCTION ALLOWED WITH RE7 SPECT TO SALE OR EXCHANGE OF PRINCIPAL

8 RESIDENCE.

9 (a) IN GENERAL.—Subsection (c) of section 165 of

10 the Internal Revenue Code of 1986 (relating to limitation

11 on losses of individuals) is amended by striking ‘‘and’’ at

12 the end of paragraph (2), by striking the period at the

13 end of paragraph (3) and inserting ‘‘; and’’, and by adding

14 at the end the following new paragraph:

15 ‘‘(4) losses arising from the sale or exchange of

16 the principal residence (within the meaning of sec17 tion 1034) of the taxpayer.’’

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

19 subsection (a) shall apply to sales and exchanges after De20 cember 31, 1994, in taxable years ending after such date.

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