I

104TH CONGRESS

1ST SESSION H. R. 512

To amend the Internal Revenue Code of 1986 to reduce the capital gains

tax on stock of domestic corporations engaged in manufacturing and

to index the basis of such stock for inflation.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 13, 1995

Mr. MEEHAN (for himself, Mr. FRANKS of New Jersey, and Mr. QUINN) 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 reduce

the capital gains tax on stock of domestic corporations

engaged in manufacturing and to index the basis of

such stock for inflation.

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

3 SECTION 1. REDUCTION IN INDIVIDUAL CAPITAL GAINS

4 RATE ON STOCK OF DOMESTIC MANUFAC5 TURERS.

6 (a) GENERAL RULE.—Subsection (h) of section 1 of

7 the Internal Revenue Code of 1986 (relating to maximum

8 capital gains rate) is amended to read as follows:
2

•HR 512 IH

1 ‘‘(h) MAXIMUM CAPITAL GAINS RATE.—

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

3 capital gain for any taxable year, then the tax im4 posed by this section shall not exceed the sum of—

5 ‘‘(A) a tax computed at the rates and in

6 the same manner as if this subsection had not

7 been enacted on the taxable income reduced by

8 the net capital gain,

9 ‘‘(B) 19 percent of the lesser of—

10 ‘‘(i) the 6-year qualified gain for the

11 taxable year, or

12 ‘‘(ii) the portion of the taxpayer’s tax13 able income for the taxable year which

14 would be taxed at a rate in excess of 15

15 percent (determined without regard to this

16 subsection),

17 ‘‘(C) the 23.5 percent of the lesser of—

18 ‘‘(i) the 3-year qualified gain for the

19 taxable year, or

20 ‘‘(ii) the excess of the amount de21 scribed in subparagraph (B)(ii) for the tax22 able year over the 6-year qualified gain for

23 such taxable year, and

24 ‘‘(D) 28 percent of the excess (if any) of

25 the net capital gain for the taxable year over
3

•HR 512 IH

1 the sum of the amounts taken into account

2 under subparagraphs (B) and (C).

3 ‘‘(2) 3-YEAR QUALIFIED GAIN.—For purposes

4 of this subsection, the term ‘3-year qualified gain’

5 means the lesser of—

6 ‘‘(A) the net capital gain for the taxable

7 year, or

8 ‘‘(B) the net capital gain for the taxable

9 year determined by taking into account only

10 gain or loss from the sale or exchange of quali11 fied manufacturer’s stock with a post-1994

12 holding period of at least 3 years but less than

13 6 years.

14 ‘‘(3) 6-YEAR QUALIFIED GAIN.—For purposes

15 of this subsection, the term ‘6-year qualified gain’

16 means the lesser of—

17 ‘‘(A) the excess of the net capital gain for

18 the taxable year over 3-year qualified gain, or

19 ‘‘(B) the net capital gain for the taxable

20 year determined by taking into account only

21 gain or loss from the sale or exchange of quali22 fied manufacturer’s stock with a post-1994

23 holding period of at least 6 years.

24 ‘‘(4) QUALIFIED MANUFACTURER’S STOCK.—

25 For purposes of this subsection, the term ‘qualified
4

•HR 512 IH

1 manufacturer’s stock’ means stock of any domestic

2 C corporation if any trade or business of such cor3 poration is described in any 2-digit Standard Indus4 trial Classification Code relating to manufacturing.

5 ‘‘(5) POST-1994 HOLDING PERIOD.—For pur6 poses of this subsection, the term ‘post-1994 holding

7 period’ means the portion of the holding period after

8 December 31, 1994.

9 ‘‘(6) TREATMENT OF PASS-THRU ENTITIES.—

10 ‘‘(A) IN GENERAL.—In applying this sub11 section with respect to any pass-thru entity, the

12 determination of the period for which any gain

13 or loss is properly taken into account shall be

14 made at the entity level.

15 ‘‘(B) PASS-THRU ENTITY.—For purposes

16 of subparagraph (A), the term ‘pass-thru entity’

17 means—

18 ‘‘(i) a regulated investment company,

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

20 ‘‘(iii) an S corporation,

21 ‘‘(iv) a partnership,

22 ‘‘(v) an estate or trust, and

23 ‘‘(vi) a common trust fund.’’

24 (b) TECHNICAL AMENDMENTS.—
5

•HR 512 IH

1 (1)(A) Section 170(e)(1)(B) of such Code is

2 amended by inserting ‘‘the applicable percentage of’’

3 before ‘‘the amount of gain’’.

4 (B) Section 170(e)(1) of such Code is amended

5 by adding at the end the following new sentence:

6 ‘‘For purposes of subparagraph (B), the term ‘appli7 cable percentage’ means the percentage determined

8 by dividing the rate of tax imposed by section 1(h)

9 by 28, or, in the case of a corporation, the rate of

10 tax imposed by section 1201(a) by 35.’’

11 (2)(A) The second sentence of section

12 7518(g)(6)(A) of such Code is amended by striking

13 ‘‘28 percent (34 percent in the case of a corpora14 tion)’’ and inserting ‘‘the rate of tax determined

15 under such section’’.

16 (B) The second sentence of section

17 607(h)(6)(A) of the Merchant Marine Act, 1936, is

18 amended by striking ‘‘28 percent (34 percent in the

19 case of a corporation)’’ and inserting ‘‘the rate of

20 tax determined under such section’’.

21 SEC. 2. REDUCTION IN CORPORATE CAPITAL GAINS RATE

22 ON STOCK OF DOMESTIC MANUFACTURERS.

23 (a) GENERAL RULE.—Section 1201 of the Internal

24 Revenue Code of 1986 (relating to alternative tax for cor25 porations) is amended by redesignating subsection (b) as
6

•HR 512 IH

1 subsection (c) and by striking subsection (a) and inserting

2 the following:

3 ‘‘(a) GENERAL RULE.—If for any taxable year a cor4 poration has a net capital gain, then, in lieu of the tax

5 imposed by section 11, 511, or 831(a) (whichever applies),

6 there is hereby imposed a tax (if such tax is less than

7 the tax imposed by such section) which shall consist of

8 the sum of—

9 ‘‘(1) a tax computed on the taxable income re10 duced by the net capital gain, at the same rates and

11 in the same manner as if this subsection had not

12 been enacted,

13 ‘‘(2) 19 percent of the lesser of—

14 ‘‘(A) the 6-year qualified gain for the tax15 able year, or

16 ‘‘(B) the portion of the taxpayer’s taxable

17 income for the taxable year which would be

18 taxed at a rate in excess of 15 percent (deter19 mined without regard to this subsection),

20 ‘‘(3) 23.5 percent of the lesser of—

21 ‘‘(A) the 3-year qualified gain for the tax22 able year, or

23 ‘‘(B) the excess of the amount described in

24 paragraph (2)(B) for the taxable year over the

25 6-year qualified gain for such taxable year, and
7

•HR 512 IH

1 ‘‘(4) 35 percent of the excess (if any) of the net

2 capital gain for the taxable year over the sum of the

3 amounts taken into account under paragraph (2)

4 and (3).

5 ‘‘(b) DEFINITIONS AND SPECIAL RULE.—For pur6 poses of subsection (a)—

7 ‘‘(1) 3-YEAR QUALIFIED GAIN AND 6-YEAR

8 QUALIFIED GAIN.—The terms ‘3-year qualified gain’

9 and ‘6-year qualified gain’ have the respective mean10 ings given to such terms by section 1(h).

11 ‘‘(2) TREATMENT OF PASS-THRU ENTITIES.—

12 Section 1(h)(6) shall apply for purposes of this sec13 tion.’’

14 (b) TECHNICAL AMENDMENT.—Clause (iii) of section

15 852(b)(3)(D) of such Code is amended by striking ‘‘65

16 percent’’ and inserting ‘‘the applicable percentage ’’ and

17 by adding at the end the following new sentence: ‘‘For

18 purposes of the preceding sentence, the term ‘applicable

19 percentage’ means 100 percent minus the percentage ap20 plicable under section 1201(a)).’’.

21 SEC. 3. INDEXING OF QUALIFIED MANUFACTURER’S STOCK

22 FOR PURPOSES OF DETERMINING GAIN OR

23 LOSS.

24 (a) IN GENERAL.—Part II of subchapter O of chap25 ter 1 of the Internal Revenue Code of 1986 (relating to
8

•HR 512 IH

1 basis rules of general application) is amended by inserting

2 after section 1021 the following new section:

3 ‘‘SEC. 1022. INDEXING OF QUALIFIED MANUFACTURER’S

4 STOCK FOR PURPOSES OF DETERMINING

5 GAIN OR LOSS.

6 ‘‘(a) GENERAL RULE.—Except as otherwise provided

7 in this subsection, if any qualified manufacturer’s stock

8 which has been held for more than 3 years (taking into

9 account only the portion of the holding period after De10 cember 31, 1994) is sold or otherwise disposed of, for pur11 poses of this title the indexed basis of the stock shall be

12 substituted for its adjusted basis.

13 ‘‘(b) QUALIFIED MANUFACTURER’S STOCK.—For

14 purposes of this section, the term ‘qualified manufactur15 er’s stock’ means stock of any domestic C corporation if—

16 ‘‘(1) any trade or business of such corporation

17 is described in any 2-digit Standard Industrial Clas18 sification Code relating to manufacturing, and

19 ‘‘(2) such stock is a capital asset in the hands

20 of the taxpayer.

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

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

24 any stock is—
9

•HR 512 IH

1 ‘‘(A) the adjusted basis of the stock, multi2 plied by

3 ‘‘(B) the applicable inflation ratio.

4 ‘‘(2) APPLICABLE INFLATION RATIO.—The ap5 plicable inflation ratio for any stock 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 stock 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 stock 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) TREATMENT OF REGULATED INVESTMENT

23 COMPANIES AND REAL ESTATE INVESTMENT TRUSTS.—

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

•HR 512 IH

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

2 provided in this paragraph, the adjustment

3 under subsection (a) shall be allowed to any

4 qualified investment entity (including for pur5 poses of determining the earnings and profits of

6 such entity).

7 ‘‘(B) EXCEPTION FOR QUALIFICATION

8 PURPOSES.—This section shall not apply for

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

10 ‘‘(2) ADJUSTMENTS TO INTERESTS HELD IN

11 ENTITY.—

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

13 investment entity shall be qualified manufactur14 er’s stock for any calendar month in the same

15 ratio as the fair market value of the qualified

16 manufacturer’s stock held by such entity at the

17 close of such month bears to the fair market

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

19 such month.

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

21 the ratio for any calendar month determined

22 under subparagraph (A) would (but for this

23 subparagraph) be 90 percent or more, such

24 ratio for such month shall be 100 percent.
11

•HR 512 IH

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

2 the ratio for any calendar month determined

3 under subparagraph (A) would (but for this

4 subparagraph) be 10 percent or less, such ratio

5 for such month shall be zero.

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

7 REAL ESTATE INVESTMENT TRUSTS.—Nothing

8 in this paragraph shall require a real estate in9 vestment trust to value its assets more fre10 quently than once each 36 months (except

11 where such trust ceases to exist). The ratio

12 under subparagraph (A) for any calendar

13 month for which there is no valuation shall be

14 the trustee’s good faith judgment as to such

15 valuation.

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

17 purposes of this subsection, the term ‘qualified in18 vestment entity’ means—

19 ‘‘(A) a regulated investment company

20 (within the meaning of section 851), and

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

22 the meaning of section 856).

23 ‘‘(e) OTHER PASS-THRU ENTITIES.—

24 ‘‘(1) PARTNERSHIPS.—In the case of a partner25 ship, the adjustment made under subsection (a) at
12

•HR 512 IH

1 the partnership level shall be passed through to the

2 partners.

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

4 corporation, the adjustment made under subsection

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

6 the shareholders.

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 ‘‘(f) DISPOSITIONS BETWEEN RELATED PERSONS.—

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

13 to any sale or other disposition of property between

14 related persons except to the extent that the basis

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

16 substituted basis.

17 ‘‘(2) RELATED PERSONS DEFINED.—For pur18 poses of this section, the term ‘related persons’

19 means—

20 ‘‘(A) persons bearing a relationship set

21 forth in section 267(b), and

22 ‘‘(B) persons treated as single employer

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

24 ‘‘(g) TRANSFERS TO INCREASE INDEXING ADJUST25 MENT.—If any person transfers cash, debt, or any other
13

•HR 512 IH

1 property to another person and the principal purpose of

2 such transfer is to secure or increase an adjustment under

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

4 such adjustment or increase.

5 ‘‘(h) SPECIAL RULES.—For purposes of this section:

6 ‘‘(1) TREATMENT AS SEPARATE STOCK.—A

7 substantial contribution to capital of a corporation

8 shall be treated as separate stock in such corpora9 tion.

10 ‘‘(2) STOCK WHICH IS NOT QUALIFIED MANU11 FACTURER’S STOCK THROUGHOUT HOLDING PE12 RIOD.—The applicable inflation ratio shall be appro13 priately reduced for periods during which stock is

14 not qualified manufacturer’s stock.

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) ACQUISITION DATE WHERE THERE HAS

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

21 WITH RESPECT TO THE TAXPAYER.—If there has

22 been a prior application of subsection (a) to stock

23 while such stock was held by the taxpayer, the date

24 of acquisition of such stock by the taxpayer shall be
14

•HR 512 IH

1 treated as not earlier than the date of the most re2 cent such prior application.

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

4 such regulations as may be necessary or appropriate to

5 carry out the purposes of this section.’’

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

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

8 is amended by inserting after the item relating to section

9 1021 the following new item:

‘‘Sec. 1022. Indexing of qualified manufacturer’s stock for purposes of determining gain or loss.’’

10 (c) ADJUSTMENT TO APPLY FOR PURPOSES OF DE11 TERMINING EARNINGS AND PROFITS.—Subsection (f) of

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

13 and profits of gain or loss and of receipt of tax-free dis14 tributions) is amended by adding at the end thereof the

15 following new paragraph:

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

17 INDEXED BASIS.—

For substitution of indexed basis for adjusted

basis in the case of the disposition of qualified manufacturer’s stock, see section 1022(a).’’

18 SEC. 4. EFFECTIVE DATE.

19 The amendments made by this Act shall apply to tax20 able years beginning after December 31, 1994.

Æ