(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
‘‘(B) persons treated as single employer
under subsection (b) or (c) of section 414.
‘‘(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 OF IMPROVEMENTS, ETC.—If
there is an addition to the adjusted basis of any tan-
gible property or of any stock in a corporation dur-
ing the taxable year by reason of an improvement to
such property or a contribution to capital of such
corporation—
‘‘(A) such addition shall never be taken
into account under subsection (c)(1)(A) if the
aggregate amount thereof during the taxable
year with respect to such property or stock is
less than $1,000, and
‘‘(B) such addition shall be treated as a
separate asset acquired at the close of such tax-
able year if the aggregate amount thereof dur-
ing the taxable year with respect to such prop-
erty or stock is $1,000 or more.
A rule similar to the rule of the preceding sentence
shall apply to any other portion of an asset to the
extent that separate treatment of such portion is ap-
propriate 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) TREATMENT
OF
CERTAIN
DISTRIBU-
TIONS.—A distribution with respect to stock in a
corporation which is not a dividend shall be treated
as a disposition.
‘‘(4) SECTION
CANNOT
INCREASE
ORDINARY
LOSS.—To the extent that (but for this paragraph)
this section would create or increase a net ordinary
loss to which section 1231(a)(2) applies or an ordi-
nary loss to which any other provision of this title
applies, such provision shall not apply. The taxpayer
shall be treated as having a long-term capital loss in
an amount equal to the amount of the ordinary loss
to which the preceding sentence applies.
‘‘(5) ACQUISITION
DATE
WHERE
THERE
HAS
BEEN
PRIOR
APPLICATION
OF
SUBSECTION
(a)(1)
WITH RESPECT TO THE TAXPAYER.—If there has
been a prior application of subsection (a)(1) to an
asset while such asset was held by the taxpayer, the
date of acquisition of such asset by the taxpayer
shall be treated as not earlier than the date of the
most recent such prior application.
‘‘(6) COLLAPSIBLE CORPORATIONS.—The appli-
cation of section 341(a) (relating to collapsible cor-
porations) shall be determined without regard to this
section.
‘‘(j) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section.’’
(b) CLERICAL AMENDMENT.—The table of sections
for part II of subchapter O of chapter 1 is amended by
inserting after the item relating to section 1021 the follow-
ing new item:
‘‘Sec. 1022. Indexing of certain assets acquired after December
31, 1996, for purposes of determining gain or
loss.’’
(c) 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 after
December 31, 1996.
(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 after December 31, 1996, from a re-
lated person (as defined in section 1022(g)(2) of the
Internal Revenue Code of 1986, as added by this
section) 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.