I

103D CONGRESS

1ST SESSION H. R. 253

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

assets for purposes of determining gain or loss and to exclude from

gross income all dividends from domestic corporations.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 5, 1993

Mr. NEAL of North Carolina 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 for purposes of determining

gain or loss and to exclude from gross income all dividends from domestic corporations.

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 ‘‘Savings and Invest5 ment Incentive Act’’.
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1 SECTION 2. INDEXING OF CERTAIN ASSETS FOR PURPOSES

2 OF 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 provided in paragraph

12 (2), if an indexed asset which has been held for

13 more than 1 year is sold or otherwise disposed of,

14 for purposes of this title the indexed basis of the

15 asset shall be substituted for its adjusted basis.

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

17 The deduction for depreciation, depletion, and amor18 tization shall be determined without regard to the

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

20 other person.

21 ‘‘(b) INDEXED ASSET.—

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

24 ‘‘(A) stock in a corporation, and

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

26 therein), which is a capital asset or property
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1 used in the trade or business (as defined in sec2 tion 1231(b)).

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

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

5 does not include—

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

7 in property which is in the nature of a credi8 tor’s interest.

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

10 to acquire an interest in property.

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

12 of a lessor, net lease property (within the mean13 ing of subsection (h)(1)).

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

15 which is fixed and preferred as to dividends and

16 does not participate in corporate growth to any

17 significant extent.

18 ‘‘(E) STOCK IN CERTAIN CORPORATIONS.—

19 Stock in—

20 ‘‘(i) an S corporation (within the

21 meaning of section 1361),

22 ‘‘(ii) a personal holding company (as

23 defined in section 542), and

24 ‘‘(iii) a foreign corporation.
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1 ‘‘(3) EXCEPTION FOR STOCK IN FOREIGN COR2 PORATION WHICH IS REGULARLY TRADED ON NA3 TIONAL OR REGIONAL EXCHANGE.—Clause (iii) of

4 paragraph (2)(E) shall not apply to stock in a for5 eign corporation the stock of which is listed on the

6 New York Stock Exchange, the American Stock Ex7 change, or any domestic regional exchange for which

8 quotations are published on a regular basis other

9 than—

10 ‘‘(A) stock of a foreign investment com11 pany (within the meaning of section 1246(b)),

12 and

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

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

16 ‘‘(c) INDEXED BASIS.—For purposes of this sec17 tion—

18 ‘‘(1) INDEXED BASIS.—The indexed basis for

19 any asset is—

20 ‘‘(A) the adjusted basis of the asset, multi21 plied by

22 ‘‘(B) the applicable inflation ratio.

23 ‘‘(2) APPLICABLE INFLATION RATIO.—The ap24 plicable inflation ratio for any asset is the percent25 age arrived at by dividing—
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1 ‘‘(A) the gross national product deflator

2 for the calendar quarter in which the disposi3 tion takes place, by

4 ‘‘(B) the gross national product deflator

5 for the calendar quarter in which the asset was

6 acquired by the taxpayer (or, if later, the cal7 endar quarter ending December 31, 1993).

8 The applicable inflation ratio shall not be taken into

9 account unless it is greater than 1. The applicable

10 inflation ratio for any asset shall be rounded to the

11 nearest one-tenth of 1 percent.

12 ‘‘(3) GROSS NATIONAL PRODUCT DEFLATOR.—

13 The gross national product deflator for any calendar

14 quarter is the implicit price deflator for the gross

15 national product for such quarter (as shown in the

16 first revision thereof).

17 ‘‘(4) SECRETARY TO PUBLISH TABLES.—The

18 Secretary shall publish tables specifying the applica19 ble inflation ratios for each calendar quarter.

20 ‘‘(d) SPECIAL RULES.—For purposes of this sec21 tion—

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

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

24 a separate asset:
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1 ‘‘(A) a substantial improvement to prop2 erty,

3 ‘‘(B) in the case of stock of a corporation,

4 a substantial contribution to capital, and

5 ‘‘(C) any other portion of an asset to the

6 extent that separate treatment of such portion

7 is appropriate to carry out the purposes of this

8 section.

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

10 THROUGHOUT HOLDING PERIOD.—

11 ‘‘(A) IN GENERAL.—The applicable infla12 tion ratio shall be appropriately reduced for cal13 endar months at any time during which the

14 asset was not an indexed asset.

15 ‘‘(B) CERTAIN SHORT SALES.—For pur16 poses of applying subparagraph (A), an asset

17 shall be treated as not an indexed asset for any

18 short sale period during which the taxpayer or

19 the taxpayer’s spouse sells short property sub20 stantially identical to the asset. For purposes of

21 the preceding sentence, the short sale period be22 gins on the day after the substantially identical

23 property is sold and ends on the closing date

24 for the sale.
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1 ‘‘(3) TREATMENT OF CERTAIN DISTRIBU2 TIONS.—A distribution with respect to stock in a

3 corporation which is not a dividend shall be treated

4 as a disposition.

5 ‘‘(4) SECTION CANNOT INCREASE ORDINARY

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

7 this section would create or increase a net ordinary

8 loss to which section 1231(a)(2) applies or an ordi9 nary loss to which any other provision of this title

10 applies, such provision shall not apply. The taxpayer

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

12 an amount equal to the amount of the ordinary loss

13 to which the preceding sentence applies.

14 ‘‘(5) ACQUISITION DATE WHERE THERE HAS

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

16 WITH RESPECT TO THE TAXPAYER.—If there has

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

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

19 date of acquisition of such asset by the taxpayer

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

21 most recent such prior application.

22 ‘‘(6) COLLAPSIBLE CORPORATIONS.—The appli23 cation of section 341(a) (relating to collapsible cor24 porations) shall be determined without regard to this

25 section.
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1 ‘‘(e) CERTAIN CONDUIT ENTITIES.—

2 ‘‘(1) REGULATED INVESTMENT COMPANIES;

3 REAL ESTATE INVESTMENT TRUSTS; COMMON TRUST

4 FUNDS.—

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

6 investment entity shall be an indexed asset for

7 any calendar month in the same ratio as the

8 fair market value of the assets held by such en9 tity at the close of such month which are in10 dexed assets bears to the fair market value of

11 all assets of such entity at the close of such

12 month.

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

14 the ratio for any calendar month determined

15 under subparagraph (A) would (but for this

16 subparagraph) be 90 percent or more, such

17 ratio for such month shall be 100 percent.

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

19 the ratio for any calendar month determined

20 under subparagraph (A) would (but for this

21 subparagraph) be 10 percent or less, such ratio

22 for such month shall be zero.

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

24 REAL ESTATE INVESTMENT TRUSTS.—Nothing

25 in this paragraph shall require a real estate in-
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1 vestment trust to value its assets more fre2 quently than once each 36 months (except

3 where such trust ceases to exist). The ratio

4 under subparagraph (A) for any calendar

5 month for which there is no valuation shall be

6 the trustee’s good faith judgment as to such

7 valuation.

8 ‘‘(E) QUALIFIED INVESTMENT ENTITY.—

9 For purposes of this paragraph, the term

10 ‘qualified investment entity’ means—

11 ‘‘(i) a regulated investment company

12 (within the meaning of section 851),

13 ‘‘(ii) a real estate investment trust

14 (within the meaning of section 856), and

15 ‘‘(iii) a common trust fund (within the

16 meaning of section 584).

17 ‘‘(2) PARTNERSHIPS.—In the case of a partner18 ship, the adjustment made under subsection (a) at

19 the partnership level shall be passed through to the

20 partners.

21 ‘‘(3) SUBCHAPTER S CORPORATIONS.—In the

22 case of an electing small business corporation, the

23 adjustment under subsection (a) at the corporate

24 level shall be passed through to the shareholders.

25 ‘‘(f) DISPOSITIONS BETWEEN RELATED PERSONS.—
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1 ‘‘(1) IN GENERAL.—This section shall not apply

2 to any sale or other disposition of property between

3 related persons except to the extent that the basis

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

5 substituted basis.

6 ‘‘(2) RELATED PERSONS DEFINED.—For pur7 poses of this section, the term ‘related persons’

8 means—

9 ‘‘(A) persons bearing a relationship set

10 forth in section 267(b), and

11 ‘‘(B) persons treated as single employer

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

13 ‘‘(g) TRANSFERS TO INCREASE INDEXING ADJUST14 MENT OR DEPRECIATION ALLOWANCE.—If any person

15 transfers cash, debt, or any other property to another per16 son and the principal purpose of such transfer is—

17 ‘‘(1) to secure or increase an adjustment under

18 subsection (a), or

19 ‘‘(2) to increase (by reason of an adjustment

20 under subsection (a)) a deduction for depreciation,

21 depletion, or amortization,

22 the Secretary may disallow part or all of such adjustment

23 or increase.

24 ‘‘(h) DEFINITIONS.—For purposes of this section—
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1 ‘‘(1) NET LEASE PROPERTY DEFINED.—The

2 term ‘net lease property’ means leased real property

3 where—

4 ‘‘(A) the term of the lease (taking into ac5 count options to renew) was 50 percent or more

6 of the useful life of the property, and

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

8 of the deductions with respect to such property

9 which are allowable to the lessor solely by rea10 son of section 162 (other than rents and reim11 bursed amounts with respect to such property)

12 is 15 percent or less of the rental income pro13 duced by such property.

14 ‘‘(2) STOCK INCLUDES INTEREST IN COMMON

15 TRUST FUND.—The term ‘stock in a corporation’ in16 cludes any interest in a common trust fund (as de17 fined in section 584(a)).

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

19 such regulations as may be necessary or appropriate to

20 carry out the purposes of this section.’’

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

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

23 is amended by inserting after the item relating to section

24 1021 the following new item:

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

gain or loss.’’
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1 (c) ADJUSTMENT TO APPLY FOR PURPOSES OF DE2 TERMINING EARNINGS AND PROFITS.—Subsection (f) of

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

4 and profits of gain or loss and of receipt of tax-free dis5 tributions) is amended by adding at the end thereof the

6 following new paragraph:

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

8 INDEXED BASIS.—

‘‘For substitution of indexed basis for adjusted

basis in the case of the disposition of certain assets

after December 31, 1993, see section 1022(a)(1).’’

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

10 this section shall apply to sales or exchanges occurring

11 after December 31, 1993, in taxable years ending after

12 such date.

13 SEC. 3. EXCLUSION FROM GROSS INCOME FOR DIVIDENDS

14 FROM DOMESTIC CORPORATIONS.

15 (a) IN GENERAL.—Part III of subchapter B of chap16 ter 1 of the Internal Revenue Code of 1986 (relating to

17 amounts specifically excluded from gross income) is

18 amended by inserting after section 115 the following new

19 section:

20 ‘‘SEC. 116. EXCLUSION OF DIVIDENDS RECEIVED BY INDI21 VIDUALS.

22 ‘‘(a) EXCLUSION FROM GROSS INCOME.—Gross in23 come does not include amounts received during the taxable
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1 year by an individual as dividends from domestic corpora2 tions.

3 ‘‘(b) CERTAIN DIVIDENDS EXCLUDED.—Subsection

4 (a) shall not apply to any dividend from a corporation

5 which, for the taxable year of the corporation in which

6 the distribution is made, or for the next preceding taxable

7 year of the corporation, is a corporation exempt from tax

8 under section 501 (relating to certain charitable, etc., or9 ganization) or section 521 (relating to farmers’ coopera10 tive associations).

11 ‘‘(c) SPECIAL RULES.—For purposes of this sec12 tion—

13 ‘‘(1) DISTRIBUTIONS FROM REGULATED IN14 VESTMENT COMPANIES AND REAL ESTATE INVEST15 MENT TRUSTS.—Subsection (a) shall apply with re16 spect to distributions by—

17 ‘‘(A) regulated investment companies to

18 the extent provided in section 854(c), and

19 ‘‘(B) real estate investment trusts to the

20 extent provided in section 857(c).

21 ‘‘(2) DISTRIBUTIONS BY A TRUST.—For pur22 poses of subsection (a), the amount of dividends

23 properly allocable to a beneficiary under section 652

24 or 662 shall be deemed to have been received by the
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1 beneficiary ratably on the same date that the divi2 dends were received by the estate or trust.

3 ‘‘(3) CERTAIN NONRESIDENT ALIENS INELI4 GIBLE FOR EXCLUSION.—In the case of a non5 resident alien individual, subsection (a) shall apply

6 only—

7 ‘‘(A) in determining the tax imposed for

8 the taxable year pursuant to section 871(b)(1)

9 and only in respect of dividends and interest

10 which are effectively connected with the conduct

11 of a trade or business within the United States,

12 or

13 ‘‘(B) in determining the tax imposed for

14 the taxable year pursuant to section 877(b).’’

15 (b) CLERICAL AND CONFORMING AMENDMENTS.—

16 (1) The table of sections for part III of sub17 chapter B of chapter 1 of such Code is amended by

18 inserting after the item relating to section 115 the

19 following new item:

‘‘Sec. 116. Exclusion of dividends received by individuals.’’

20 (2) Subsection (c) of section 584 of such Code

21 is amended by adding at the end thereof the follow22 ing new sentence:

23 ‘‘The proportionate share of each participant in the

24 amount of dividends received by the common trust fund

25 and to which section 116 applies shall be considered for
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1 purposes of such section as having been received by such

2 participant.’’

3 (3) Subsection (a) of section 643(a) of such

4 Code is amended by inserting after paragraph (6)

5 the following new paragraph:

6 ‘‘(7) DIVIDENDS.—There shall be included the

7 amount of any dividends excluded from gross income

8 pursuant to section 116.’’

9 (4) Section 854 of such Code is amended by

10 adding at the end thereof the following new sub11 section:

12 ‘‘(c) TREATMENT UNDER SECTION 116.—

13 ‘‘(1) IN GENERAL.—For purposes of section

14 116, in the case of any dividend (other than a divi15 dend described in subsection (a)) received from a

16 regulated investment company which meets the re17 quirements of section 852 for the taxable year in

18 which it paid the dividend—

19 ‘‘(A) the entire amount of such dividend

20 shall be treated as a dividend if the aggregate

21 dividends received by such company during the

22 taxable year equal or exceed 75 percent of its

23 gross income, or

24 ‘‘(B) if subparagraph (A) does not apply,

25 a portion of such dividend shall be treated as
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1 a dividend based on the portion of the compa2 ny’s gross income which consists of aggregate

3 dividends, as the case may be.

4 ‘‘(2) NOTICE TO SHAREHOLDERS.—The amount

5 of any distribution by a regulated investment com6 pany which may be taken into account as a dividend

7 for purposes of the exclusion under section 116 shall

8 not exceed the amount so designated by the com9 pany in a written notice to its shareholders mailed

10 not later than 45 days after the close of its taxable

11 year.

12 ‘‘(3) DEFINITIONS.—For purposes of this sub13 section—

14 ‘‘(A) The term ‘gross income’ does not in15 clude gain from the sale or other disposition of

16 stock or securities.

17 ‘‘(B) The term ‘aggregate dividends re18 ceived’ includes only dividends received from do19 mestic corporations other than dividends de20 scribed in section 116(b). In determining the

21 amount of any dividend for purposes of this

22 subparagraph, the rules provided in section

23 116(c)(1) (relating to certain distributions)

24 shall apply.’’
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1 (6) Subsection (c) of section 857 of such Code

2 is amended to read as follows:

3 ‘‘(c) LIMITATIONS APPLICABLE TO DIVIDENDS RE4 CEIVED FROM REAL ESTATE INVESTMENT TRUSTS.—For

5 purposes of section 116 (relating to an exclusion for divi6 dends received by individuals) and section 243 (relating

7 to deductions for dividends received by corporations), a

8 dividend received from a real estate investment trust

9 which meets the requirements of this part shall not be con10 sidered as a dividend.’’

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

12 this section shall apply with respect to taxable years begin13 ning after December 31, 1993.

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