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.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. INDEXING OF CERTAIN ASSETS ACQUIRED ON
OR AFTER JANUARY 1, 1995, FOR PURPOSES
OF DETERMINING GAIN.
(a) IN GENERAL.—Part II of subchapter O of chap-
ter 1 of the Internal Revenue Code of 1986 (relating to
basis rules of general application) is amended by inserting
after section 1021 the following new section:
‘‘SEC. 1022. INDEXING OF CERTAIN ASSETS ACQUIRED ON
OR AFTER JANUARY 1, 1995, FOR PURPOSES
OF DETERMINING GAIN.
‘‘(a) GENERAL RULE.—
‘‘(1) INDEXED
BASIS
SUBSTITUTED
FOR
AD-
JUSTED BASIS.—Solely for purposes of determining
gain on the sale or other disposition by a taxpayer
(other than a corporation) of an indexed asset which
has been held for more than 1 year, the indexed
basis of the asset shall be substituted for its ad-
justed basis.
‘‘(2) SPECIAL RULE FOR RECAPTURE GAIN.—
‘‘(A) IN
GENERAL.—Paragraph (1) shall
not apply for purposes of determining the
amount of recapture gain on the sale or other
disposition of an indexed asset, but the amount
of any such recapture gain shall increase the
adjusted basis of the asset for purposes of ap-
plying paragraph (1) to determine the amount
of other gain on such sale or other disposition.
‘‘(B) RECAPTURE GAIN.—For purposes of
subparagraph (A), the term ‘recapture gain’
means any gain treated as ordinary income
under section 1245, 1250, or 1254.
‘‘(b) INDEXED ASSET.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘indexed asset’ means—
‘‘(A) any stock in a corporation, and
‘‘(B) any tangible property (or any interest
therein),
which is a capital asset or property used in the trade
or business (as defined in section 1231(b)) and the
holding period of which begins on or after January
1, 1995.
‘‘(2) CERTAIN
PROPERTY
EXCLUDED.—For
purposes of this section, the term ‘indexed asset’
does not include—
‘‘(A) CREDITOR’S INTEREST.—Any interest
in property which is in the nature of a credi-
tor’s interest.
‘‘(B) COLLECTIBLES.—Any collectible (as
defined in section 408(m)(2) without regard to
section 408(m)(3)).
‘‘(C) OPTIONS.—Any option or other right
to acquire an interest in property.
‘‘(D) NET LEASE PROPERTY.—In the case
of a lessor, net lease property (within the mean-
ing of subsection (1)(3)).
‘‘(E) 
STOCK
IN
FOREIGN
CORPORA-
TIONS.—Stock in a foreign corporation.
‘‘(F) STOCK IN S CORPORATIONS.—Stock
in an S corporation.
‘‘(3) EXCEPTION FOR STOCK IN FOREIGN COR-
PORATION WHICH IS REGULARLY TRADED ON NA-
TIONAL
OR
REGIONAL
EXCHANGE.—Paragraph
(2)(E) shall not apply to stock in a foreign corpora-
tion the stock of which is listed on the New York
Stock Exchange, the American Stock Exchange, or
any domestic regional exchange for which quotations
are published on a regular basis or is authorized for
trading on the national market system operated by
the National Association of Securities Dealers other
than—
‘‘(A) a passive foreign corporation (as de-
fined in section 1296), and
‘‘(B) stock in a foreign corporation held by
a United States person who meets the require-
ments of section 1248(a)(2).
‘‘(c) INDEXED BASIS.—For purposes of this sec-
tion—
‘‘(1) INDEXED BASIS.—The indexed basis for
any asset is—
‘‘(A) the adjusted basis of the asset, multi-
plied by
‘‘(B) the applicable inflation ratio.
‘‘(2) APPLICABLE INFLATION RATIO.—The ap-
plicable inflation ratio for any asset shall be deter-
mined by dividing—
‘‘(A) The CPI for the calendar year pre-
ceding the calendar year in which the disposi-
tion takes place, by
‘‘(B) the CPI for the calendar year preced-
ing the calendar year in which the taxpayer’s
holding period for such asset began.
The applicable inflation ratio shall not be taken into
account unless it is greater than 1. The applicable
inflation ratio for any asset shall be rounded to the
nearest one-thousandth.
‘‘(3) CONVENTIONS.—For purposes of para-
graph (2), if any asset is disposed of during any cal-
endar year—
‘‘(A) such disposition shall be treated as
occurring on the last day of such calendar year,
and
‘‘(B) the taxpayer’s holding period for such
asset shall be treated as beginning in the same
calendar year as would be determined for an
asset actually disposed of on such last day with
a holding period of the same length as the ac-
tual holding period of the asset involved.
‘‘(4) CPI.—For purposes of this subsection, the
CPI for any calendar year shall be determined under
section 1(f)(4).
‘‘(d) SHORT SALES.—
‘‘(1) IN GENERAL.—In the case of a short sale
of an indexed asset with a short sale period in excess
of 1 year, for purposes of this title, the amount real-
ized shall be an amount equal to the amount realized
(determined without regard to this paragraph) mul-
tiplied by the applicable inflation ratio. In applying
subsection (c)(2) for purposes of the preceding sen-
tence, the date on which the property is sold short
shall be treated as the date on which the holding pe-
riod for the asset begins and the closing date for the
sale shall be treated as the date of disposition.
‘‘(2) SHORT
SALE
OF
SUBSTANTIALLY
IDEN-
TICAL PROPERTY.—If the taxpayer or the taxpayer’s
spouse sells short property substantially identical to
an asset held by the taxpayer, the asset held by the
taxpayer and the substantially identical property
shall not be treated as indexed assets for the short
sale period.
‘‘(3) SHORT SALE PERIOD.—For purposes of
this subsection, the short sale period begins on the
day after property is sold and ends on the closing
date for the sale.
‘‘(e) TREATMENT
OF
REGULATED
INVESTMENT
COMPANIES AND REAL ESTATE INVESTMENT TRUSTS.—
‘‘(1) ADJUSTMENTS AT ENTITY LEVEL.—
‘‘(A) IN GENERAL.—Except as otherwise
provided in this paragraph, the adjustment
under subsection (a) shall be allowed to any
qualified investment entity (including for pur-
poses of determining the earnings and profits of
such entity).
‘‘(B) EXCEPTION FOR CORPORATE SHARE-
HOLDERS.—Under regulations—
‘‘(i) in the case of a distribution by a
qualified investment entity (directly or in-
directly) to a corporation—
‘‘(I) the determination of whether
such distribution is a dividend shall be
made without regard to this section,
and
‘‘(A) IN GENERAL.—Stock in a qualified
investment entity shall be an indexed asset for
any calendar month in the same ratio as the
fair market value of the assets held by such en-
tity at the close of such month which are in-
dexed assets (determined without regard to the
requirement that the holding period begin on or
after January 1, 1995) bears to the fair market
value of all assets of such entity at the close of
such month.
‘‘(B) RATIO OF 90 PERCENT OR MORE.—If
the ratio for any calendar month determined
under subparagraph (A) would (but for this
subparagraph) be 90 percent or more, such
ratio for such month shall be 100 percent.
‘‘(C) RATIO OF 10 PERCENT OR LESS.—If
the ratio for any calendar month determined
under subparagraph (A) would (but for this
subparagraph) be 10 percent or less, such ratio
for such month shall be zero.
‘‘(D) VALUATION OF ASSETS IN CASE OF
REAL ESTATE INVESTMENT TRUSTS.—Nothing
in this paragraph shall require a real estate in-
vestment trust to value its assets more fre-
quently than once each 36 months (except
where such trust ceases to exist). The ratio
under subparagraph (A) for any calendar
month for which there is no valuation shall be
the trustee’s good faith judgment as to such
valuation.
‘‘(3) QUALIFIED
INVESTMENT
ENTITY.—For
purposes of this subsection, the term ‘qualified in-
vestment entity’ means—
‘‘(A) a regulated investment company
(within the meaning of section 851), and
‘‘(B) a real estate investment trust (within
the meaning of section 856).
‘‘(f) OTHER PASS-THRU ENTITIES.—
‘‘(1) PARTNERSHIPS.—In the case of a partner-
ship, the adjustment made under subsection (a) at
the partnership level shall be passed through to the
partners (but only for purposes of determining the
income of partners who are not corporations).
‘‘(2) S CORPORATIONS.—In the case of an S
corporation, the adjustment made under subsection
(a) at the corporate level shall be passed through to
the shareholders. This section shall not apply for
purposes of determining the amount of any tax im-
posed by section 1374 or 1375.
‘‘(3) COMMON TRUST FUNDS.—In the case of a
common trust fund, the adjustment made under sub-
section (a) at the trust level shall be passed through
to the participants (but only for purposes of deter-
mining the income of participants who are not cor-
porations).
‘‘(g) DISPOSITIONS BETWEEN RELATED PERSONS.—
This section shall not apply to any sale or other disposition
of property between related persons (within the meaning
of section 465(b)(3)(C)) if such property, in the hands of
the transferee, is of a character subject to the allowance
for depreciation provided in section 167.
‘‘(h) TRANSFERS TO INCREASE INDEXING ADJUST-
MENT.—If any person transfers cash, debt, or any other
property to another person and the principal purpose of
such transfer is to secure or increase an adjustment under
subsection (a), the Secretary may disallow part or all of
such adjustment or increase.
‘‘(i) SPECIAL RULES.—For purposes of this section—
‘‘(1) TREATMENT AS SEPARATE ASSET.—In the
case of any asset, the following shall be treated as
a separate asset:
‘‘(A) A substantial improvement to prop-
erty.
‘‘(B) In the case of stock of a corporation,
a substantial contribution to capital.
‘‘(C) Any other portion of an asset to the
extent that separate treatment of such portion
is appropriate to carry out the purposes of this
section.
‘‘(2) ASSETS WHICH ARE NOT INDEXED ASSETS
THROUGHOUT HOLDING PERIOD.—The applicable in-
flation ratio shall be appropriately reduced for peri-
ods during which the asset was not an indexed asset.
‘‘(3) NET
LEASE
PROPERTY
DEFINED.—The
term ‘net lease property’ means leased property
where—
‘‘(A) the term of the lease (taking into ac-
count options to renew) was 50 percent or more
of the useful life of the property, and
‘‘(B) for the period of the lease, the sum
of the deductions with respect to such property
which are allowable to the lessor solely by rea-
son of section 162 (other than rents and reim-
bursed amounts with respect to such property)
is 15 percent or less of the rental income pro-
duced by such property.
‘‘(j) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section.’’
(b) GAINS AND LOSSES FROM INDEXED ASSETS NOT
TAKEN INTO ACCOUNT UNDER LIMITATION ON INVEST-
MENT
INTEREST.—Subparagraph 
(B) 
of 
section
163(d)(4) of such Code (defining investment income) is
amended by adding at the end thereof the following new
sentences: ‘‘Gain from the sale or other disposition of an
indexed asset (as defined in section 1022) held for more
than 1 year shall not be taken into account for purposes
of the preceding sentence. The preceding sentence shall
not apply to gain from the sale or other disposition of any
such asset if the taxpayer elects to waive the benefits of
section 1022 in determining the amount of such gain.’’
(c) RECAPTURE OF ENTIRE AMOUNT OF DEPRECIA-
TION UNDER SECTION 1250.—Section 1250 of such Code
(relating to gain from dispositions of certain depreciable
realty) is amended by adding at the end thereof the follow-
ing new subsection:
‘‘(i) RECAPTURE OF ENTIRE AMOUNT OF DEPRECIA-
TION IN CASE OF PROPERTY TO WHICH SECTION 1022
APPLIES.—
‘‘(1) IN GENERAL.—In the case of any taxpayer
other than a corporation—
‘‘(A) subsection (a) shall be applied with
respect to any disposition of section 1250 prop-
erty to which section 1022 applies as if it read
as follows:
‘‘ ‘(a) GENERAL RULE.—Except as otherwise pro-
vided in this section, if section 1250 property is disposed
of, the lesser of—
‘‘ ‘(1) the depreciation adjustments in respect of
such property, or
‘‘ ‘(2) the excess of—
‘‘ ‘(A) the amount realized (or, in the case
of a disposition other than sale, exchange, or in-
voluntary conversion, the fair market value of
such property), over
‘‘ ‘(B) the adjusted basis of such property,
shall be treated as gain which is ordinary income. Such
gain shall be recognized notwithstanding any other provi-
sion of this subtitle.’, and
‘‘(B) in the case of any disposition de-
scribed in subparagraph (A), subsections (e)
and (f) shall not apply and appropriate adjust-
ments shall be made in the provisions of sub-
section (d).
‘‘(2) SPECIAL RULES FOR CERTAIN ENTITIES.—
For purposes of paragraph (1), the following shall
not be treated as a corporation:
‘‘(A) An S corporation.
‘‘(B) A regulated investment company.
‘‘(C) A real estate investment trust.
‘‘(3) COORDINATION
WITH
SECTION
453(i).—
Subsection (i) of section 453 shall be applied with-
out regard to this subsection.’’.
(d) CLERICAL AMENDMENT.—The table of sections
for part II of subchapter O of chapter 1 of such Code
is amended by inserting after the item relating to section
1021 the following new item:
‘‘Sec. 1022. Indexing of certain assets acquired on or after Janu-
ary 1, 1995, for purposes of determining gain.’’.
(e) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to the disposition of any
property the holding period of which begins on or
after January 1, 1995.
(2) CERTAIN TRANSACTIONS BETWEEN RELAT-
ED PERSONS.—The amendments made by this sec-
tion shall not apply to the disposition of any prop-
erty acquired on or after January 1, 1995, from a
related person (as defined in section 465(b)(3)(C) of
the Internal Revenue Code of 1986) if—
(A) such property was so acquired for a
price less than the property’s fair market value,
and
(B) the amendments made by this section
did not apply to such property in the hands of
such related person.
(f) ELECTION TO RECOGNIZE GAIN ON READILY
TRADABLE SECURITIES HELD ON JANUARY 1, 1995.—
(1) IN GENERAL.—If a taxpayer other than a
corporation holds any readily tradable security on
January 1, 1995, the taxpayer may elect to treat
such security as having been sold on the last busi-
ness day before such date for an amount equal to its
closing market price on such last business day (and
as having been reacquired on such last business day
for an amount equal to such closing market price).
(2) TREATMENT OF GAIN OR LOSS.—
(A) Any gain resulting from an election
under paragraph (1) shall be treated as received
or accrued on the last business day referred to
in paragraph (1).
(B) Any loss resulting from an election
under paragraph (1) shall not be allowed for
any taxable year.
(3) ELECTION.—An election under paragraph
(1) shall be made in such manner as the Secretary
may prescribe and shall specify the readily tradable
securities for which such election is made. Such an
election, once made with respect to any readily
tradable security, shall be irrevocable.
(4) READILY TRADABLE SECURITY.—For pur-
poses of this subsection, the term ‘‘readily tradable
security’’ means any stock or other security which,
as of January 1, 1995, is readily tradable on an es-
tablished securities market or otherwise.
Æ
HR 537 IH——2