acquired by the taxpayer (or, if later, the cal-
endar quarter ending on December 31, 1994).
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-tenth of 1 percent.
‘‘(3) GROSS NATIONAL PRODUCT DEFLATOR.—
The gross national product deflator for any calendar
quarter is the implicit price deflator for the gross
national product for such quarter (as shown in the
first revision thereof).
‘‘(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)(3) 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
QUALIFICATION
PURPOSES.—This section shall not apply for
purposes of sections 851(b) and 856(c).
‘‘(2) ADJUSTMENTS
TO
INTERESTS
HELD
IN
ENTITY.—
‘‘(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 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.—
‘‘(A) IN GENERAL.—In the case of a part-
nership, the adjustment made under subsection
(a) at the partnership level shall be passed
through to the partners.
‘‘(B) SPECIAL RULE IN THE CASE OF SEC-
TION 754 ELECTIONS.—In the case of a transfer
of an interest in a partnership with respect to
which the election provided in section 754 is in
effect—
‘‘(i) the adjustment under section
743(b)(1) shall, with respect to the trans-
feror partner, be treated as a sale of the
partnership assets for purposes of applying
this section, and
‘‘(ii) with respect to the transferee
partner, the partnership’s holding period
for purposes of this section in such assets
shall be treated as beginning on the date
of such adjustment.
‘‘(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.
‘‘(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.
‘‘(g) DISPOSITIONS BETWEEN RELATED PERSONS.—
‘‘(1) IN GENERAL.—This section shall not apply
to any sale or other disposition of property between
related persons except to the extent that the basis
of such property in the hands of the transferee is a
substituted basis.
‘‘(2) RELATED PERSONS DEFINED.—For pur-
poses of this section, the term ‘related persons’
means—
‘‘(A) persons bearing a relationship set
forth in section 267(b), and