I
105TH CONGRESS
1ST SESSION
H. R. 245
To amend the Internal Revenue Code of 1986 to phaseout the tax of capital
gains, to increase the unified credit under the estate and gift taxes,
and to increase the maximum benefit under section 2032A to $1,000,000.
IN THE HOUSE OF REPRESENTATIVES
JANUARY 7, 1997
Mr. PAPPAS 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 phaseout
the tax of capital gains, to increase the unified credit
under the estate and gift taxes, and to increase the
maximum benefit under section 2032A to $1,000,000.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE, ETC.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Small Business/Family Farm and Investment Fairness
Act of 1997’’.
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
ment or repeal is expressed in terms of an amendment
to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986.
SEC. 2. PHASEOUT OF CAPITAL GAINS RATE FOR INDIVID-
UALS.
(a) IN GENERAL.—Subsection (h) of section 1 (relat-
ing to maximum capital gains rate) is amended to read
as follows:
‘‘(h) MAXIMUM CAPITAL GAINS RATE.—
‘‘(1) IN GENERAL.—If a taxpayer has a net
capital gain for any taxable year, the tax imposed by
this section for such taxable year shall not exceed
the sum of—
‘‘(A) a tax computed at the rates and in
the same manner as if this subsection had not
been enacted on taxable income reduced by the
net capital gain, plus
‘‘(B) a tax equal to the applicable percent-
age of the net capital gain.
‘‘(2) APPLICABLE PERCENTAGE.—For purposes
of paragraph (1), the term ‘applicable percentage’
means the percentage determined in accordance with
the following table:
The applicable
For taxable years beginning in:
percentage is:
1997 .........................................................................................
1998 .........................................................................................
1999 .........................................................................................
2000 .........................................................................................
2001 .........................................................................................
2002 .........................................................................................
2003 .........................................................................................
2004 .........................................................................................
2005 .........................................................................................
2006 .........................................................................................
2007 .........................................................................................
2008 .........................................................................................
2009 .........................................................................................
2010 .........................................................................................
2011 or thereafter ....................................................................
0.
‘‘(3) NET CAPITAL GAIN TAKEN INTO ACCOUNT
AS INVESTMENT INCOME.—For purposes of this sub-
section, the net capital gain for any taxable year
shall be reduced (but not below zero) by the amount
which the taxpayer elects to take into account as in-
vestment income under section 163(d)(4)(B)(iii).’’
(b) MINIMUM TAX.—
(1) IN GENERAL.—Subparagraph (A) of section
55(b)(1) is amended by redesignating clauses (ii)
and (iii) as clauses (iii) and (iv), respectively, and by
inserting after clause (i) the following new clause:
‘‘(ii) MAXIMUM RATE OF TAX ON NET
CAPITAL
GAIN.—The amount determined
under the first sentence of clause (i) shall
not exceed the sum of—
‘‘(I) 
the 
amount 
determined
under such first sentence computed at
the rates and in the same manner as
if this clause had not been enacted on
the taxable excess reduced by the net
capital gain, plus
‘‘(II) a tax equal to the applica-
ble percentage (as defined in section
1(h)) of the lesser of the net capital
gain or the taxable excess.’’
(2) CONFORMING AMENDMENT.—Clause (iii) of
section 55(a)(1)(A) (as redesignated by paragraph
(1)) is amended by striking ‘‘clause (i)’’ and insert-
ing ‘‘this subparagraph’’.
(c) CONFORMING AMENDMENTS.—
(1) Section 1202 (relating to 50-percent exclu-
sion for gain from certain small business stock) is
hereby repealed.
(2)(A) Subsection (a) of section 57 is amended
by striking paragraph (7).
(B) Subclause (II) of section 53(d)(1)(B)(ii) is
amended by striking ‘‘, (5), and (7)’’ and inserting
‘‘and (5)’’.
(3) Paragraph (1) of section 170(e) of such
Code is amended—
(A) by striking ‘‘the amount of gain’’ in
the material following subparagraph (B)(ii) and
inserting ‘‘the appropriate percentage of the
amount of gain’’, and
(B) by adding at the end the following new
sentence: ‘‘For purposes of subparagraph (B),
the term ‘appropriate percentage’ means the
percentage equal to the fraction the numerator
of which is the applicable percentage under sec-
tion 1(h) or 1201(b) (whichever is appropriate)
over 28 percent (35 percent in the case of a
corporation).’’
(4) Paragraph (2) of section 172(d) is amended
to read as follows:
‘‘(2) CAPITAL
GAINS
AND
LOSSES
OF
TAX-
PAYERS OTHER THAN CORPORATIONS.—In the case
of a taxpayer other than a corporation, the amount
deductible on account of losses from sales or ex-
changes of capital assets shall not exceed the
amount includible on account of gains from sales or
exchanges of capital assets.’’
(5) Paragraph (4) of section 642(c) is amended
by striking the first sentence.
(6) Paragraph (3) of section 643(a) is amended
by striking the last sentence.
(7) Paragraph (4) of section 691(c) is amended
by striking ‘‘1202,’’.
(8) The second sentence of section 871(a)(2) is
amended by striking ‘‘such gains and losses shall be
determined without regard to section 1202 and’’.
(9) Subsection (a) of section 1044 is amended
by striking the last sentence.
(10) Paragraph (1) of section 1445(e) is
amended by striking ‘‘28 percent’’ and inserting
‘‘the applicable percentage under section 1(h)’’.
(11) Section 6652 is amended by striking sub-
section (k) and by redesignating subsections (l) and
(m) as subsections (k) and (l), respectively.
(12)(A) 
The 
second 
sentence 
of 
section
7518(g)(6)(A) is amended by striking ‘‘28 percent’’
and all that follows and inserting ‘‘the applicable
percentage under the appropriate such section.’’.
(B) 
The 
second 
sentence 
of 
section
607(h)(6)(A) of the Merchant Marine Act, 1936 is
amended by striking ‘‘28 percent’’ and all that fol-
lows and inserting ‘‘the applicable percentage under
the appropriate such section.’’.
(13) The table of sections for part I of sub-
chapter P of chapter 1 is amended by striking the
item relating to section 1202.
(d) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to taxable years beginning after Decem-
ber 31, 1996.
(2) WITHHOLDING.—The amendment made by
subsection (c)(10) shall apply to amounts paid after
the date of the enactment of this Act.
SEC. 3. PHASEDOWN OF CAPITAL GAINS RATE FOR COR-
PORATIONS.
(a) IN GENERAL.—Section 1201 is amended to read
as follows:
‘‘SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS.
‘‘(a) GENERAL RULE.—If for any taxable year a cor-
poration has a net capital gain, then, in lieu of the tax
imposed by sections 11, 511, and 831 (a) and (b) (which-
ever is applicable), there is hereby imposed a tax (if such
tax is less than the tax imposed by such sections) which
shall consist of the sum of—
‘‘(1) a tax computed on the taxable income re-
duced by the amount of the net capital gain, at the
rates and in the manner as if this subsection had
not been enacted, plus
‘‘(2) a tax equal to the applicable percentage of
the net capital gain.
‘‘(b) APPLICABLE PERCENTAGE.—For purposes of
paragraph (1), the term ‘applicable percentage’ means the
percentage determined in accordance with the following
table:
The applicable
For taxable years beginning in:
percentage is:
1997 .........................................................................................
1998 .........................................................................................
1999 .........................................................................................
2000 .........................................................................................
2001 .........................................................................................
2002 .........................................................................................
2003 .........................................................................................
2004 .........................................................................................
2005 .........................................................................................
2006 .........................................................................................
2007 .........................................................................................
2008 .........................................................................................
2009 .........................................................................................
2010 .........................................................................................
2011 or thereafter ....................................................................
14.
‘‘(c) 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 compa-
nies 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).’’
(b) MINIMUM TAX.—Subparagraph (B) of section
55(b)(1) is amended to read as follows:
‘‘(B) CORPORATIONS.—
‘‘(i) IN GENERAL.—In the case of a
corporation, the tentative minimum tax for
the taxable year is—
‘‘(I) 20 percent of so much of the
alternative minimum taxable income
for the taxable year as exceeds the ex-
emption amount, reduced by
‘‘(II) the alternative minimum
tax foreign tax credit for the taxable
year.
‘‘(ii) MAXIMUM RATE OF TAX ON NET
CAPITAL GAIN.—If for any taxable year the
applicable 
percentage 
under 
section
1201(b) is less than 20 percent, the
amount determined under subclause (I) of
clause (i) for such taxable year shall not
exceed the sum of—
‘‘(I) 
the 
amount 
determined
under such subclause computed at the
rates and in the same manner as if
this clause had not been enacted on
the excess described in such subclause
reduced by the net capital gain, plus
‘‘(II) a tax equal to the applica-
ble percentage (as defined in section
1201(b)) of the lesser of the net cap-
ital gain or such excess.’’
(c) TECHNICAL AMENDMENTS.—
(1) Clause (iii) of section 852(b)(3)(D) is
amended—
(A) by striking ‘‘65 percent’’ and inserting
‘‘the appropriate percentage’’, and
(B) by adding at the end the following new
sentence: ‘‘For purposes of this clause, the term
‘appropriate percentage’ means the percentage
equal to the excess of 100 percent over the ap-
plicable percentage under section 1201(b).’’
(2) Subsection (e) of section 1445 is amended
by striking ‘‘35 percent’’ each place it appears and
inserting ‘‘the applicable percentage under section
1201(b)’’.
(d) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to taxable years ending after December
31, 1996.
(2) WITHHOLDING.—The amendment made by
subsection (c)(2) shall apply to amounts paid after
the date of the enactment of this Act.
(e) TRANSITIONAL RULE.—
(1) IN GENERAL.—In the case of any taxable
year ending after December 31, 1996, and beginning
on or before such date, paragraph (2) of section
1201(a) of the Internal Revenue Code of 1986 (as
amended by this section) shall be applied as if it
read as follows:
‘‘(2) the sum of—
‘‘(A) a tax of 28 percent of the lesser of—
‘‘(i) the net capital gain for the tax-
able year, or
‘‘(ii) the net capital gain taking into
account only gain or loss properly taken
into account for the portion of the taxable
year after December 31, 1996, plus
‘‘(B) a tax of 35 percent of the excess of—
‘‘(i) the net capital gain for the tax-
able year, over
‘‘(ii) the amount of net capital gain
taken into account under subparagraph
(A).’’
(2) SPECIAL RULE FOR PASS-THRU ENTITIES.—
(A) IN GENERAL.—In applying paragraph
(1) with respect to any pass-thru entity, the de-
termination of when gains and losses are prop-
erly taken into account shall be made at the en-
tity level.
(B) PASS-THRU
ENTITY
DEFINED.—For
purposes of subparagraph (A), the term ‘‘pass-
thru entity’’ means—
(i) a regulated investment company,
(ii) a real estate investment trust,
(iii) an S corporation,
(iv) a partnership,
(v) an estate or trust, and
(vi) a common trust fund.
SEC. 4. INCREASE IN UNIFIED ESTATE AND GIFT TAX CRED-
IT.
(a) IN GENERAL.—
(1) Subsection (a) of section 2010 (relating to
unified credit against estate tax) is amended by
striking ‘‘$192,800’’ and inserting ‘‘the applicable
credit amount’’.
(2) Section 2010 is amended by redesignating
subsection (c) as subsection (d) and by inserting
after subsection (b) the following new subsection:
‘‘(c) APPLICABLE CREDIT AMOUNT.—For purposes
of this section, the applicable credit amount is the amount
of the tentative tax which would be determined under the
rate schedule set forth in section 2001(c) if the amount
with respect to which such tentative tax is to be computed
were $1,000,000.’’
(3) Paragraph (1) of section 6018(a) is amend-
ed 
by 
striking 
‘‘$600,000’’ 
and 
inserting
‘‘$1,000,000’’.