I 

108TH CONGRESS 

1ST SESSION H. R. 44

To amend the Internal Revenue Code of 1986 to provide reduced capital 

gain rates for qualified economic stimulus gain and to index the basis 

of assets of individuals for purposes of determining gains and losses. 

IN THE HOUSE OF REPRESENTATIVES 

JANUARY 7, 2003

Mr. DREIER (for himself, Mr. HALL, Ms. DUNN, Ms. MCCARTHY of Missouri, 

Mr. ENGLISH, Mr. SESSIONS, Mr. TOOMEY, and Mr. MANZULLO) 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 

reduced capital gain rates for qualified economic stimulus 

gain and to index the basis of assets of individuals for 

purposes of determining gains and losses.

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, ETC. 

4 (a) SHORT TITLE.—This Act may be cited as the 

5 ‘‘Investment Tax Incentive Act of 2003’’. 

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend-
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1 ment or repeal is expressed in terms of an amendment 

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

3 shall be considered to be made to a section or other provi4 sion of the Internal Revenue Code of 1986. 

5 SEC. 2. REDUCED CAPITAL GAIN RATES FOR QUALIFIED 

6 ECONOMIC STIMULUS GAIN.

7 (a) MAXIMUM CAPITAL GAIN RATE FOR INDIVID8 UALS.—

9 (1) IN GENERAL.—Paragraph (2) of section 

10 1(h) (relating to reduced capital gain rates for quali11 fied 5-year gain) is amended to read as follows: 

12 ‘‘(2) REDUCED CAPITAL GAIN RATES FOR

13 QUALIFIED 5-YEAR GAIN, QUALIFIED ECONOMIC

14 STIMULUS GAIN, AND QUALIFIED SECTION 1202 ECO15 NOMIC STIMULUS GAIN.—

16 ‘‘(A) REDUCTION IN 10-PERCENT RATE.—

17 The rate under paragraph (1)(B) shall be—

18 ‘‘(i) 5 percent with respect to so much 

19 of the amount to which the 10-percent rate 

20 would otherwise apply as does not exceed 

21 qualified economic stimulus gain, 

22 ‘‘(ii) 8 percent with respect to so 

23 much of such amount not taken into ac24 count under clause (i) as does not exceed 

25 qualified 5-year gain, and 
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1 ‘‘(iii) 10 percent with respect to the 

2 remainder of such amount. 

3 ‘‘(B) REDUCTION IN 20-PERCENT RATE.—

4 The rate under paragraph (1)(C) shall be—

5 ‘‘(i) 10 percent with respect to so 

6 much of the amount to which the 20-per7 cent rate would otherwise apply as does 

8 not exceed the excess of qualified economic 

9 stimulus gain over the amount of such 

10 gain taken into account under subpara11 graph (A)(i), 

12 ‘‘(ii) 18 percent with respect to so 

13 much of such amount not taken into ac14 count under clause (i) as does not exceed 

15 the lesser of—

16 ‘‘(I) the excess of qualified 5-year 

17 gain over the amount of such gain 

18 taken into account under subpara19 graph (A)(ii), or 

20 ‘‘(II) the amount of qualified 5-

21 year gain (determined by taking into 

22 account only property the holding pe23 riod for which begins after December 

24 31, 2000), and 
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1 ‘‘(iii) 20 percent with respect to the 

2 remainder of such amount. 

3 For purposes of determining under clause 

4 (ii)(II) whether the holding period of property 

5 begins after December 31, 2000, the holding 

6 period of property acquired pursuant to the ex7 ercise of an option (or other right or obligation 

8 to acquire property) shall include the period 

9 such option (or other right or obligation) was 

10 held. 

11 ‘‘(C) REDUCTION IN 28-PERCENT RATE.—

12 The rate under paragraph (1)(E) shall be—

13 ‘‘(i) 14 percent with respect to so 

14 much of the amount to which the 28-per15 cent rate would otherwise apply as does 

16 not exceed qualified section 1202 economic 

17 stimulus gain, and 

18 ‘‘(ii) 28 percent with respect to the re19 mainder of such amount.’’. 

20 (2) QUALIFIED ECONOMIC STIMULUS GAIN; 

21 QUALIFIED SECTION 1202 ECONOMIC STIMULUS

22 GAIN.—Subsection (h) of section 1 (relating to max23 imum capital gains rate) is amended by adding at 

24 the end the following new paragraphs: 
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1 ‘‘(13) QUALIFIED ECONOMIC STIMULUS GAIN.—

2 For purposes of this subsection, the term ‘qualified 

3 economic stimulus gain’ means the aggregate long4 term capital gain from property the holding period 

5 for which begins during the 2-year period beginning 

6 on the date of the enactment of this paragraph. The 

7 determination under the preceding sentence shall be 

8 made without regard to collectibles gain, gain de9 scribed in paragraph (7)(A)(i), and section 1202 

10 gain. 

11 ‘‘(14) QUALIFIED SECTION 1202 ECONOMIC

12 STIMULUS GAIN.—For purposes of this subsection, 

13 the term ‘qualified section 1202 economic stimulus 

14 gain’ means the aggregate section 1202 gain from 

15 property the holding period for which begins during 

16 the 2-year period beginning on the date of the enact17 ment of this paragraph.’’. 

18 (3) EXCLUSION OF QUALIFIED ECONOMIC STIM19 ULUS GAIN FROM QUALIFIED 5-YEAR GAIN.—Para20 graph (9) of section 1(h) is amended by inserting 

21 ‘‘qualified economic stimulus gain,’’ before ‘‘collect22 ibles gain’’. 

23 (b) MAXIMUM CAPITAL GAIN RATE FOR CORPORA24 TIONS.—Section 1201 is amended to read as follows: 
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1 ‘‘SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS. 

2 ‘‘(a) GENERAL RULE.—If for any taxable year a cor3 poration has a qualified economic stimulus gain, then, in 

4 lieu of any tax imposed by sections 11, 511, and 831(a) 

5 and (b), there is hereby imposed a tax (if such tax is less 

6 than the tax imposed by such sections) which shall consist 

7 of the sum of—

8 ‘‘(1) a tax computed on the taxable income re9 duced by the amount of qualified economic stimulus 

10 gain, at the rates and in the manner as if this sub11 section had not been enacted, plus 

12 ‘‘(2) a tax of 20 percent of the qualified eco13 nomic stimulus gain (or, if less, taxable income). 

14 ‘‘(b) QUALIFIED ECONOMIC STIMULUS GAIN.—For 

15 purposes of this section, the term ‘qualified economic stim16 ulus gain’ has the meaning given such term in section 

17 1(h)(13), except that such gain shall not exceed the net 

18 capital gain. 

19 ‘‘(c) REGULATIONS.—Rules similar to the rules of 

20 section 1(h)(11) shall apply for purposes of this section. 

21 ‘‘(d) CROSS REFERENCES.—

‘‘For computation of the alternative tax—

‘‘(1) in the case of life insurance companies, see 

section 801(a)(2), 

‘‘(2) in the case of regulated investment companies and their shareholders, see section 852(b)(3)(A) 

and (D), and 

‘‘(3) in the case of real estate investment trusts, 

see section 857(b)(3)(A).’’
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1 (c) CONFORMING AMENDMENT.—Section 

2 857(b)(3)(A)(ii) is amended by striking ‘‘determined at 

3 the rate provided in section 1201(a)’’ and inserting ‘‘, de4 termined as provided in section 1201(a),’’. 

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

6 this section shall apply to taxable years beginning after 

7 the date of the enactment of this Act. 

8 SEC. 3. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF 

9 DETERMINING GAIN OR LOSS. 

10 (a) IN GENERAL.—Part II of subchapter O of chap11 ter 1 (relating to basis rules of general application) is 

12 amended by redesignating section 1023 as section 1024 

13 and by inserting after section 1022 the following new sec14 tion: 

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

16 OF DETERMINING GAIN OR LOSS. 

17 ‘‘(a) GENERAL RULE.—

18 ‘‘(1) INDEXED BASIS SUBSTITUTED FOR AD19 JUSTED BASIS.—Solely for purposes of determining 

20 gain or loss on the sale or other disposition by a tax21 payer (other than a corporation) of an indexed asset 

22 which has been held for more than 3 years, the in23 dexed basis of the asset shall be substituted for its 

24 adjusted basis. 
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1 ‘‘(2) EXCEPTION FOR DEPRECIATION, ETC.—

2 The deductions for depreciation, depletion, and am3 ortization shall be determined without regard to the 

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

5 other person. 

6 ‘‘(b) INDEXED ASSET.—

7 ‘‘(1) IN GENERAL.—For purposes of this sec8 tion, the term ‘indexed asset’ means—

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

10 (other than a foreign corporation), and 

11 ‘‘(B) tangible property, 

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

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

14 ‘‘(2) STOCK IN CERTAIN FOREIGN CORPORA15 TIONS INCLUDED.—For purposes of this section—

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

17 asset’ includes common stock in a foreign cor18 poration which is regularly traded on an estab19 lished securities market. 

20 ‘‘(B) EXCEPTION.—Subparagraph (A) 

21 shall not apply to—

22 ‘‘(i) stock of a foreign investment 

23 company (within the meaning of section 

24 1246(b)), 
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1 ‘‘(ii) stock in a passive foreign invest2 ment company (as defined in section 

3 1296), 

4 ‘‘(iii) stock in a foreign corporation 

5 held by a United States person who meets 

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

7 and

8 ‘‘(iv) stock in a foreign personal hold9 ing company (as defined in section 552). 

10 ‘‘(C) TREATMENT OF AMERICAN DEPOSI11 TORY RECEIPTS.—An American depository re12 ceipt for common stock in a foreign corporation 

13 shall be treated as common stock in such cor14 poration. 

15 ‘‘(c) INDEXED BASIS.—For purposes of this sec16 tion—

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

18 any asset is—

19 ‘‘(A) the adjusted basis of the asset, in20 creased by 

21 ‘‘(B) the applicable inflation adjustment. 

22 ‘‘(2) APPLICABLE INFLATION ADJUSTMENT.—

23 The applicable inflation adjustment for any asset is 

24 an amount equal to—
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1 ‘‘(A) the adjusted basis of the asset, multi2 plied by 

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

4 ‘‘(i) the gross domestic product 

5 deflator for the last calendar quarter end6 ing before the asset is disposed of, exceeds 

7 ‘‘(ii) the gross domestic product 

8 deflator for the last calendar quarter end9 ing before the asset was acquired by the 

10 taxpayer (or, if later, the calendar quarter 

11 ending on December 31, 2002). 

12 The percentage under subparagraph (B) shall be 

rounded to the nearest 1 13 ⁄10 of 1 percentage point. 

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

15 The gross domestic product deflator for any cal16 endar quarter is the implicit price deflator for the 

17 gross domestic product for such quarter (as shown 

18 in the last revision thereof released by the Secretary 

19 of Commerce before the close of the following cal20 endar quarter).

21 ‘‘(d) SUSPENSION OF HOLDING PERIOD WHERE DI22 MINISHED RISK OF LOSS; TREATMENT OF SHORT

23 SALES.—

24 ‘‘(1) IN GENERAL.—If the taxpayer (or a re25 lated person) enters into any transaction which sub-
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1 stantially reduces the risk of loss from holding any 

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

3 asset for the period of such reduced risk. 

4 ‘‘(2) SHORT SALES.—

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

6 sale of an indexed asset with a short sale period 

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

8 the amount realized shall be an amount equal 

9 to the amount realized (determined without re10 gard to this paragraph) increased by the appli11 cable inflation adjustment. In applying sub12 section (c)(2) for purposes of the preceding sen13 tence, the date on which the property is sold 

14 short shall be treated as the date of acquisition 

15 and the closing date for the sale shall be treat16 ed as the date of disposition. 

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

18 of subparagraph (A), the short sale period be19 gins on the day that the property is sold and 

20 ends on the closing date for the sale. 

21 ‘‘(e) TREATMENT OF REGULATED INVESTMENT

22 COMPANIES AND REAL ESTATE INVESTMENT TRUSTS.—

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

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

25 provided in this paragraph, the adjustment 
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1 under subsection (a) shall be allowed to any 

2 qualified investment entity (including for pur3 poses of determining the earnings and profits of 

4 such entity). 

5 ‘‘(B) EXCEPTION FOR CORPORATE SHARE6 HOLDERS.—Under regulations—

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

8 qualified investment entity (directly or in9 directly) to a corporation—

10 ‘‘(I) the determination of whether 

11 such distribution is a dividend shall be 

12 made without regard to this section, 

13 and 

14 ‘‘(II) the amount treated as gain 

15 by reason of the receipt of any capital 

16 gain dividend shall be increased by the 

17 percentage by which the entity’s net 

18 capital gain for the taxable year (de19 termined without regard to this sec20 tion) exceeds the entity’s net capital 

21 gain for such year determined with re22 gard to this section, and 

23 ‘‘(ii) there shall be other appropriate 

24 adjustments (including deemed distribu25 tions) so as to ensure that the benefits of 
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1 this section are not allowed (directly or in2 directly) to corporate shareholders of quali3 fied investment entities. 

4 For purposes of the preceding sentence, any 

5 amount includible in gross income under section 

6 852(b)(3)(D) shall be treated as a capital gain 

7 dividend and an S corporation shall not be 

8 treated as a corporation. 

9 ‘‘(C) EXCEPTION FOR QUALIFICATION

10 PURPOSES.—This section shall not apply for 

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

12 ‘‘(D) EXCEPTION FOR CERTAIN TAXES IM13 POSED AT ENTITY LEVEL.—

14 ‘‘(i) TAX ON FAILURE TO DISTRIBUTE

15 ENTIRE GAIN.—If any amount is subject to 

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

17 taxable year, the amount on which tax is 

18 imposed under such section shall be in19 creased by the percentage determined 

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

21 rule shall apply in the case of any amount 

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

23 of section 857(b) to the extent attributable 

24 to the excess of the net capital gain over 

25 the deduction for dividends paid deter-
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1 mined with reference to capital gain divi2 dends only. The first sentence of this 

3 clause shall not apply to so much of the 

4 amount subject to tax under section 

5 852(b)(3)(A) as is designated by the com6 pany under section 852(b)(3)(D).

7 ‘‘(ii) OTHER TAXES.—This section 

8 shall not apply for purposes of determining 

9 the amount of any tax imposed by para10 graph (4), (5), or (6) of section 857(b). 

11 ‘‘(2) ADJUSTMENTS TO INTERESTS HELD IN

12 ENTITY.—

13 ‘‘(A) REGULATED INVESTMENT COMPA14 NIES.—Stock in a regulated investment com15 pany (within the meaning of section 851) shall 

16 be an indexed asset for any calendar quarter in 

17 the same ratio as—

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

19 values of the indexed assets held by such 

20 company at the close of each month during 

21 such quarter, bears to 

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

23 values of all assets held by such company 

24 at the close of each such month. 
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1 ‘‘(B) REAL ESTATE INVESTMENT

2 TRUSTS.—Stock in a real estate investment 

3 trust (within the meaning of section 856) shall 

4 be an indexed asset for any calendar quarter in 

5 the same ratio as—

6 ‘‘(i) the fair market value of the in7 dexed assets held by such trust at the close 

8 of such quarter, bears to 

9 ‘‘(ii) the fair market value of all as10 sets held by such trust at the close of such 

11 quarter. 

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

13 the ratio for any calendar quarter determined 

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

15 this subparagraph) be 80 percent or more, such 

16 ratio for such quarter shall be 100 percent. 

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

18 the ratio for any calendar quarter determined 

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

20 this subparagraph) be 20 percent or less, such 

21 ratio for such quarter shall be zero. 

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

23 purposes of this paragraph, a qualified invest24 ment entity which holds a partnership interest 

25 shall be treated (in lieu of holding a partnership 
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1 interest) as holding its proportionate share of 

2 the assets held by the partnership. 

3 ‘‘(3) TREATMENT OF RETURN OF CAPITAL DIS4 TRIBUTIONS.—Except as otherwise provided by the 

5 Secretary, a distribution with respect to stock in a 

6 qualified investment entity which is not a dividend 

7 and which results in a reduction in the adjusted 

8 basis of such stock shall be treated as allocable to 

9 stock acquired by the taxpayer in the order in which 

10 such stock was acquired. 

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

12 purposes of this subsection, the term ‘qualified in13 vestment entity’ means—

14 ‘‘(A) a regulated investment company 

15 (within the meaning of section 851), and 

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

17 the meaning of section 856). 

18 ‘‘(f) OTHER PASS-THRU ENTITIES.—

19 ‘‘(1) PARTNERSHIPS.—

20 ‘‘(A) IN GENERAL.—In the case of a part21 nership, the adjustment made under subsection 

22 (a) at the partnership level shall be passed 

23 through to the partners. 

24 ‘‘(B) SPECIAL RULE IN THE CASE OF SEC25 TION 754 ELECTIONS.—In the case of a transfer 
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1 of an interest in a partnership with respect to 

2 which the election provided in section 754 is in 

3 effect—

4 ‘‘(i) the adjustment under section 

5 743(b)(1) shall, with respect to the trans6 feror partner, be treated as a sale of the 

7 partnership assets for purposes of applying 

8 this section, and 

9 ‘‘(ii) with respect to the transferee 

10 partner, the partnership’s holding period 

11 for purposes of this section in such assets 

12 shall be treated as beginning on the date 

13 of such adjustment. 

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

15 corporation, the adjustment made under subsection 

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

17 the shareholders. This section shall not apply for 

18 purposes of determining the amount of any tax im19 posed by section 1374 or 1375. 

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

21 common trust fund, the adjustment made under sub22 section (a) at the trust level shall be passed through 

23 to the participants. 

24 ‘‘(4) INDEXING ADJUSTMENT DISREGARDED IN

25 DETERMINING LOSS ON SALE OF INTEREST IN ENTI-
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1 TY.—Notwithstanding the preceding provisions of 

2 this subsection, for purposes of determining the 

3 amount of any loss on a sale or exchange of an in4 terest in a partnership, S corporation, or common 

5 trust fund, the adjustment made under subsection 

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

7 the adjusted basis of such interest. 

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

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

10 to any sale or other disposition of property between 

11 related persons except to the extent that the basis 

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

13 substituted basis. 

14 ‘‘(2) RELATED PERSONS DEFINED.—For pur15 poses of this section, the term ‘related persons’ 

16 means—

17 ‘‘(A) persons bearing a relationship set 

18 forth in section 267(b), and 

19 ‘‘(B) persons treated as single employer 

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

21 ‘‘(h) TRANSFERS TO INCREASE INDEXING ADJUST22 MENT.—If any person transfers cash, debt, or any other 

23 property to another person and the principal purpose of 

24 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 OF IMPROVEMENTS, ETC.—If 

5 there is an addition to the adjusted basis of any tan6 gible property or of any stock in a corporation dur7 ing the taxable year by reason of an improvement to 

8 such property or a contribution to capital of such 

9 corporation—

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

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

12 aggregate amount thereof during the taxable 

13 year with respect to such property or stock is 

14 less than $1,000, and 

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

16 separate asset acquired at the close of such tax17 able year if the aggregate amount thereof dur18 ing the taxable year with respect to such prop19 erty or stock is $1,000 or more. 

20 A rule similar to the rule of the preceding sentence 

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

22 extent that separate treatment of such portion is ap23 propriate to carry out the purposes of this section. 

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

25 THROUGHOUT HOLDING PERIOD.—The applicable in-
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1 flation adjustment shall be appropriately reduced for 

2 periods during which the asset was not an indexed 

3 asset. 

4 ‘‘(3) TREATMENT OF CERTAIN DISTRIBU5 TIONS.—A distribution with respect to stock in a 

6 corporation which is not a dividend shall be treated 

7 as a disposition. 

8 ‘‘(4) SECTION CANNOT INCREASE ORDINARY

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

10 this section would create or increase a net ordinary 

11 loss to which section 1231(a)(2) applies or an ordi12 nary loss to which any other provision of this title 

13 applies, such provision shall not apply. The taxpayer 

14 shall be treated as having a long-term capital loss in 

15 an amount equal to the amount of the ordinary loss 

16 to which the preceding sentence applies. 

17 ‘‘(5) ACQUISITION DATE WHERE THERE HAS

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

19 WITH RESPECT TO THE TAXPAYER.—If there has 

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

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

22 date of acquisition of such asset by the taxpayer 

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

24 most recent such prior application. 
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1 ‘‘(6) COLLAPSIBLE CORPORATIONS.—The appli2 cation of section 341(a) (relating to collapsible cor3 porations) shall be determined without regard to this 

4 section. 

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

6 such regulations as may be necessary or appropriate to 

7 carry out the purposes of this section.’’

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

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

10 striking the item relating to section 1023 and inserting 

11 after the item relating to section 1022 the following new 

12 items:

‘‘Sec. 1023. Indexing of certain assets for purposes of determining 

gain or loss. 

‘‘Sec. 1024. Cross references.’’

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

14 this section shall apply to dispositions after December 31, 

15 2002, in taxable years ending after such date.

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