SEC. 2. 50 PERCENT CAPITAL GAINS DEDUCTION.
(a) GENERAL RULE.—Part I of subchapter P of
chapter 1 of the Internal Revenue Code of 1986 (relating
to treatment of capital gains) is amended to read as fol-
lows:
‘‘PART I—TREATMENT OF CAPITAL GAINS
‘‘Sec. 1201. Capital gains deduction.
‘‘SEC. 1201. CAPITAL GAINS DEDUCTION.
‘‘(a) GENERAL RULE.—If for any taxable year a tax-
payer has a net capital gain, 50 percent of such gain shall
be a deduction from gross income.
‘‘(b) ESTATES AND TRUSTS.—In the case of an es-
tate or trust, the deduction shall be computed by excluding
the portion (if any) of the gains for the taxable year from
sales or exchanges of capital assets which, under sections
652 and 662 (relating to inclusions of amounts in gross
income of beneficiaries of trusts), is includible by the in-
come beneficiaries as gain derived from the sale or ex-
change of capital assets.
‘‘(c) COORDINATION WITH TREATMENT OF CAPITAL
GAIN UNDER LIMITATION ON INVESTMENT INTEREST.—
For purposes of this section, the net capital gain for any
taxable year shall be reduced (but not below zero) by the
amount which the taxpayer takes into account as invest-
ment income under section 163(d)(4)(B)(iii).
‘‘(d) TRANSITIONAL RULE.—
‘‘(1) IN GENERAL.—In the case of a taxable
year which includes February 1, 1994, the amount
taken into account as the net capital gain under
subsection (a) shall not exceed the net capital gain
determined by only taking into account gains and
losses properly taken into account for the portion of
the taxable year on or after February 1, 1994.
‘‘(2) SPECIAL
RULES
FOR
PASS-THRU
ENTI-
TIES.—
‘‘(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.’’
(b) DEDUCTION ALLOWABLE
IN COMPUTING AD-
JUSTED GROSS INCOME.—Subsection (a) of section 62 of
such Code is amended by inserting after paragraph (15)
the following new paragraph:
‘‘(16) LONG-TERM
CAPITAL
GAINS.—The de-
duction allowed by section 1201.’’
(c) TECHNICAL AND CONFORMING CHANGES.—
(1) Section 13113 of the Revenue Reconcili-
ation Act of 1993 (relating to 50-percent exclusion
for gain from certain small business stock), and the
amendments made by such section, are hereby re-
pealed; and the Internal Revenue Code of 1986 shall
be applied as if such section (and amendments) had
never been enacted.
(2) Section 1 of such Code is amended by strik-
ing subsection (h).
(3) Paragraph (1) of section 170(e) of such
Code is amended by striking ‘‘the amount of gain’’
in the material following subparagraph (B)(ii) and
inserting ‘‘50 percent of the amount of gain’’.
(4)(A) Paragraph (2) of section 172(d) of such
Code is amended to read as follows:
‘‘(2) CAPITAL GAINS AND LOSSES.—
‘‘(A) LOSSES OF TAXPAYERS OTHER THAN
CORPORATIONS.—In the case of a taxpayer
other than a corporation, the amount deductible
on account of losses from sales or exchanges of
capital assets shall not exceed the amount in-
cludible on account of gains from sales or ex-
changes of capital assets.
‘‘(B) DEDUCTION UNDER SECTION 1201.—
The deduction under section 1201 shall not be
allowed.’’
(B) Subparagraph (B) of section 172(d)(4) of
such Code is amended by striking ‘‘paragraphs (1)
and (3)’’ and inserting ‘‘paragraphs (1), (2)(B), and
(3)’’.
(5) Paragraph (4) of section 642(c) of such
Code is amended to read as follows:
‘‘(4) ADJUSTMENTS.—To the extent that the
amount otherwise allowable as a deduction under
this subsection consists of gain from the sale or ex-
change of capital assets held for more than 1 year,
proper adjustment shall be made for any deduction
allowable to the estate or trust under section 1201
(relating to deduction for excess of capital gains over
capital losses). In the case of a trust, the deduction
allowed by this subsection shall be subject to section
681 (relating to unrelated business income).’’
(6) Paragraph (3) of section 643(a) of such
Code is amended by adding at the end thereof the
following new sentence: ‘‘The deduction under sec-
tion 1201 (relating to deduction of excess of capital
gains over capital losses) shall not be taken into ac-
count.’’
(7) Paragraph (4) of section 691(c) of such
Code is amended by striking ‘‘sections 1(h), 1201,
and 1211’’ and inserting ‘‘sections 1201 and 1211’’.
(8) The second sentence of section 871(a)(2) of
such Code is amended by inserting ‘‘such gains and
losses shall be determined without regard to section
1201 (relating to deduction for capital gains) and’’
after ‘‘except that’’.
(9) Subsection (d) of section 1044 of such Code
is amended by striking the last sentence.
(10)(A) Paragraph (2) of section 1211(b) of
such Code is amended to read as follows:
‘‘(2) the sum of—
‘‘(A) the excess of the net short-term cap-
ital loss over the net long-term capital gain, and
‘‘(B) one-half of the excess of the net long-
term capital loss over the net short-term capital
gain.’’
(B) So much of paragraph (2) of section
1212(b) of such Code as precedes subparagraph (B)
thereof is amended to read as follows:
‘‘(2) SPECIAL RULES.—
‘‘(A) ADJUSTMENTS.—
‘‘(i) For purposes of determining the
excess referred to in paragraph (1)(A),
there shall be treated as short-term capital
gain in the taxable year an amount equal
to the lesser of—
‘‘(I) the amount allowed for the
taxable year under paragraph (1) or
(2) of section 1211(b), or
‘‘(II) the adjusted taxable income
for such taxable year.
‘‘(ii) For purposes of determining the
excess referred to in paragraph (1)(B),
there shall be treated as short-term capital
gain in the taxable year an amount equal
to the sum of—
‘‘(I) the amount allowed for the
taxable year under paragraph (1) or
(2) of section 1211(b) or the adjusted
taxable income for such taxable year,
whichever is the least, plus
‘‘(II) the excess of the amount
described in subclause (I) over the net
short-term capital loss (determined
without regard to this subsection) for
such year.’’
(11) Paragraph (1) of section 1402(i) of such
Code is amended by inserting ‘‘, and the deduction
provided by section 1201 shall not apply’’ before the
period at the end thereof.
(12) Section 12 of such Code is amended by
striking paragraph (4) and redesignating the follow-
ing paragraphs accordingly.
(13) Paragraph (2) of section 527(b) of such
Code is hereby repealed.
(14) Subparagraph (D) of section 593(b)(2) of
such Code is amended by adding ‘‘and’’ at the end
of clause (iii), by striking ‘‘, and’’ at the end of
clause (iv) and inserting a period, and by striking
clause (v).
(15) Paragraph (2) of section 801(a) of such
Code is hereby repealed.
(16) Subsection (c) of section 831 of such Code
is amended by striking paragraph (1) and redesig-
nating the following paragraphs accordingly.
(17)(A) Subparagraph (A) of section 852(b)(3)
of such Code is amended by striking ‘‘, determined
as provided in section 1201(a), on’’ and inserting
‘‘of 17.5 percent of’’.
(B) Clause (iii) of section 852(b)(3)(D) of such
Code is amended—
(i) by striking ‘‘65 percent’’ and inserting
‘‘82.5 percent’’, and
(ii) by striking ‘‘section 1201(a)’’ and in-
serting ‘‘subparagraph (A)’’.
(18) Clause (ii) of section 857(b)(3)(A) of such
Code is amended by striking ‘‘determined at the rate
provided in section 1201(a) on’’ and inserting ‘‘of
17.5 percent of’’.
(19) Paragraph (1) of section 882(a) of such
Code is amended by striking ‘‘section 11, 55, or
1201(a)’’ and inserting ‘‘section 11 or 55’’.
(20) Subsection (b) of section 904 of such Code
is amended by striking paragraphs (2)(B), (3)(B),
(3)(D), and (3)(E).
(21) Subsection (b) of section 1374 of such
Code is amended by striking paragraph (4).
(22) Subsection (b) of section 1381 is amended
by striking ‘‘or 1201’’.
(23) Paragraph (1) of section 1445(e) of such
Code is amended by striking ‘‘35 percent (or, to the
extent provided in regulations, 28 percent)’’ and in-
serting ‘‘17.5 percent (or, to the extent provided in
regulations, 19.8 percent)’’.
(24) Clause (i) of section 6425(c)(1)(A) of such
Code is amended by striking ‘‘or 1201(a)’’.
(25) Clause (i) of section 6655(g)(1)(A) of such
Code is amended by striking ‘‘or 1201(a)’’.
(26)(A) 
The 
second 
sentence 
of 
section
7518(g)(6)(A) of such Code is amended—
(i) by striking ‘‘during a taxable year to
which section 1(h) or 1201(a) applies’’, and
(ii) by striking ‘‘28 percent (34 percent’’
and inserting ‘‘19.8 percent (17.5 percent’’.
(B) 
The 
second 
sentence 
of 
section
607(h)(6)(A) of the Merchant Marine Act, 1936 is
amended—
(i) by striking ‘‘during a taxable year to
which section 1(h) or 1201(a) of such Code ap-
plies’’, and
(ii) by striking ‘‘28 percent (34 percent’’
and inserting ‘‘19.8 percent (17.5 percent’’.
(d) EFFECTIVE DATE.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by
this section shall apply to taxable years ending after
the date of the enactment of this Act.
(2) TRANSITIONAL
RULE.—The amendments
made by subsection (c) (other than paragraph (3))
shall not apply to gains and losses properly taken
into account for the portion of the taxable year be-
fore February 1, 1994.
(3) CONTRIBUTIONS.—The amendment made
by subsection (c)(3) shall apply only to contributions
on or after February 1, 1994.
(4) WITHHOLDING.—The amendment made by
subsection (c)(23) shall apply only to amounts paid
after the date of the enactment of this Act.
SEC. 3. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF
DETERMINING GAIN OR LOSS.
(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 FOR PURPOSES
OF DETERMINING GAIN OR LOSS.
‘‘(a) GENERAL RULE.—
‘‘(1) INDEXED
BASIS
SUBSTITUTED
FOR
AD-
JUSTED
BASIS.—Except as otherwise provided in
this subsection, if an indexed asset which has been
held for more than 1 year is sold or otherwise dis-
posed of, for purposes of this title the indexed basis
of the asset shall be substituted for its adjusted
basis.
‘‘(2) EXCEPTION
FOR
DEPRECIATION, ETC.—
The deduction for depreciation, depletion, and amor-
tization shall be determined without regard to the
application of paragraph (1) to the taxpayer or any
other person.
‘‘(b) INDEXED ASSET.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘indexed asset’ means—
‘‘(A) stock in a corporation, and
‘‘(B) 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)).
‘‘(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) OPTIONS.—Any option or other right
to acquire an interest in property.
‘‘(C) NET LEASE PROPERTY.—In the case
of a lessor, net lease property (within the mean-
ing of subsection (i)(3)).
‘‘(D) CERTAIN PREFERRED STOCK.—Stock
which is fixed and preferred as to dividends and
does not participate in corporate growth to any
significant extent.
‘‘(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, the
national market system operated by the National As-
sociation of Securities Dealers, or any domestic re-
gional exchange for which quotations are published
on a regular basis other than—
‘‘(A) stock of a foreign investment com-
pany (within the meaning of section 1246(b)),
‘‘(B) stock in a passive foreign investment
company (as defined in section 1296), and
‘‘(C) 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 section:
‘‘(1) GENERAL RULE.—Except as provided in
paragraph (2), 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 is the percent-
age arrived at by dividing—
‘‘(A) the gross national product deflator
the calendar quarter in which the disposition
takes place, by
‘‘(B) the gross national product deflator
for the calendar quarter in which the asset was
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
‘‘(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 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.
‘‘(4) 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.
‘‘(5) 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.
‘‘(6) 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.
‘‘(7) 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 of such Code
is amended by inserting after the item relating to section
1021 the following new item:
‘‘Sec. 1022. Indexing of certain assets for purposes of determining
gain or loss.’’
(c) ADJUSTMENT TO APPLY FOR PURPOSES OF DE-
TERMINING EARNINGS AND PROFITS.—Subsection (f) of
section 312 of such Code (relating to effect on earnings
and profits of gain or loss and of receipt of tax-free dis-
tributions) is amended by adding at the end thereof the
following new paragraph:
‘‘(3) EFFECT ON EARNINGS AND PROFITS OF
INDEXED BASIS.—
For substitution of indexed basis for adjusted
basis in the case of the disposition of certain assets,
see section 1022(a)(1).’’
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to dispositions after December 31,
1994, in taxable years ending after such date.
SEC. 4. CAPITAL LOSS DEDUCTION ALLOWED WITH RE-
SPECT TO SALE OR EXCHANGE OF PRINCIPAL
RESIDENCE.
(a) IN GENERAL.—Subsection (c) of section 165 of
the Internal Revenue Code of 1986 (relating to limitation
on losses of individuals) is amended by striking ‘‘and’’ at
the end of paragraph (2), by striking the period at the
end of paragraph (3) and inserting ‘‘; and’’, and by adding
at the end the following new paragraph:
‘‘(4) losses arising from the sale or exchange of
the principal residence (within the meaning of sec-
tion 1034) of the taxpayer.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to sales and exchanges on or
after February 1, 1994, in taxable years ending after such
date.
Æ
HR 3739 IH——2