‘‘(C) ADDITIONAL
REPORTING
REQUIRE-
MENTS.—The Secretary shall require that
trustees of AD IRAs, trustees of individual re-
tirement plans, or both, whichever is appro-
priate, shall include such additional information
in reports required under section 408(i) as is
necessary to ensure that amounts required to be
included in gross income under subparagraph
(B) are so included.
‘‘(4) QUALIFIED FIRST-TIME HOMEBUYER DIS-
TRIBUTION.—For purposes of this section—
‘‘(A) IN
GENERAL.—The term ‘qualified
first-time homebuyer distribution’ means any
payment or distribution received by an individ-
ual to the extent such payment or distribution
is used by the individual before the close of the
60th day after the day on which such payment
or distribution is received to pay qualified ac-
quisition costs with respect to a principal resi-
dence of a first-time homebuyer who is such in-
dividual, the spouse of such individual, or any
child, grandchild, or ancestor of such individual
or the individual’s spouse.
‘‘(B) LIFETIME
DOLLAR
LIMITATION.—
The aggregate amount of payments or distribu-
tions received by an individual which may be
treated as qualified first-time homebuyer dis-
tributions for any taxable year shall not exceed
the excess (if any) of—
‘‘(i) $10,000, over
‘‘(ii) the aggregate amounts treated as
qualified first-time homebuyer distributions
with respect to such individual for all prior
taxable years.
‘‘(C) QUALIFIED
ACQUISITION
COSTS.—
For purposes of this paragraph, the term
‘qualified acquisition costs’ means the costs of
acquiring, constructing, or reconstructing a res-
idence. Such term includes any usual or reason-
able settlement, financing, or other closing
costs.
‘‘(D) FIRST-TIME
HOMEBUYER; 
OTHER
DEFINITIONS.—For purposes of this para-
graph—
‘‘(i) FIRST-TIME
HOMEBUYER.—The
term ‘first-time homebuyer’ means any in-
dividual if—
‘‘(I) such individual (and if mar-
ried, such individual’s spouse) had no
present ownership interest in a prin-
cipal residence during the 2-year pe-
riod ending on the date of acquisition
of the principal residence to which
this paragraph applies, and
‘‘(II) subsection (h) or (k) of sec-
tion 1034 (as in effect on the day be-
fore the date of the enactment of this
section) did not suspend the running
of any period of time specified in sec-
tion 1034 (as so in effect) with re-
spect to such individual on the day be-
fore the date the distribution is ap-
plied pursuant to subparagraph (A).
‘‘(ii) 
PRINCIPAL
RESIDENCE.—The
term ‘principal residence’ has the same
meaning as when used in section 121.
‘‘(iii) DATE
OF
ACQUISITION.—The
term ‘date of acquisition’ means the date—
‘‘(I) on which a binding contract
to acquire the principal residence to
which subparagraph (A) applies is en-
tered into, or
‘‘(II) on which construction or re-
construction of such a principal resi-
dence is commenced.
‘‘(E) SPECIAL RULE WHERE DELAY IN AC-
QUISITION.—If any distribution from any indi-
vidual retirement plan fails to meet the require-
ments of subparagraph (A) solely by reason of
a delay or cancellation of the purchase or con-
struction of the residence, the amount of the
distribution may be contributed to an individual
retirement 
plan 
as 
provided 
in 
section
408(d)(3)(A)(i) (determined by substituting
‘120 days’ for ‘60 days’ in such section), except
that—
‘‘(i) section 408(d)(3)(B) shall not be
applied to such contribution, and
‘‘(ii) such amount shall not be taken
into account in determining whether sec-
tion 408(d)(3)(A)(i) applies to any other
amount.
‘‘(e) QUALIFIED ROLLOVER CONTRIBUTION.—For
purposes of this section, the term ‘qualified rollover con-
tribution’ means a rollover contribution to an AD IRA
from another such account, but only if such rollover con-
tribution meets the requirements of section 408(d)(3).’’.
(b) 
REPEAL
OF
NONDEDUCTIBLE
CONTRIBU-
TIONS.—
(1) Subsection (f) of section 219 is amended by
striking paragraph (7).
(2) Paragraph (5) of section 408(d) is amended
by striking the last sentence.
(3) Section 408(o) is amended by adding at the
end the following new paragraph:
‘‘(5) TERMINATION.—This subsection shall not
apply to any designated nondeductible contribution
for any taxable year beginning after December 31,
1997.’’.
(4) Subsection (b) of section 4973 is amended
by striking the last sentence.
(c) EXCESS DISTRIBUTIONS TAX NOT TO APPLY.—
(1) Subparagraph (A) of section 4980A(d)(3) is
amended by inserting ‘‘(other than AD IRAs, as de-
fined in section 4980A(b))’’ after ‘‘individual retire-
ment plans’’.
(2) Subparagraph (B) of section 4980A(e)(1) is
amended by inserting ‘‘other than an AD IRA (as
defined in section 408A(b))’’ after ‘‘retirement
plan’’.
(d) EXCESS CONTRIBUTIONS.—
(1) Section 4973 is amended by adding at the
end the following new subsection:
‘‘(f) EXCESS CONTRIBUTIONS TO AMERICAN DREAM
IRAS.—For purposes of this section, in the case of Amer-
ican Dream IRAs, the term ‘excess contributions’ means
the amount by which the amount contributed for the tax-
able year to such IRAs exceeds the limitation in section
408A(c)(2).’’.
(2) Subsection (b) of section 4973 is amended
by adding at the end the following new sentence:
‘‘For purposes of this subsection, an American
Dream IRA shall not be treated as an individual re-
tirement plan.’’.
(e) CLERICAL AMENDMENT.—The table of sections
for subpart A of part I of subchapter D of chapter 1 is
amended by inserting after the item relating to section
408 the following new item:
‘‘Sec. 408A. American Dream IRA.’’.
(f) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
Subtitle B—Capital Gains
PART I—INDIVIDUAL CAPITAL GAINS
SEC. 311. 20 PERCENT MAXIMUM CAPITAL GAINS RATE FOR
INDIVIDUALS.
(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) the base tax amount,
‘‘(B) 10 percent of so much of the tax-
payer’s adjusted net capital gain (or, if less,
taxable income) as does not exceed the excess
(if any) of—
‘‘(i) the amount of taxable income
which would (without regard to this para-
graph) be taxed at a rate of 15 percent or
less, over
‘‘(ii) the taxable income reduced by
the adjusted net capital gain, plus
‘‘(C) 20 percent of the taxpayer’s adjusted
net capital gain (or, if less, taxable income) in
excess of the amount on which a tax is deter-
mined under subparagraph (B).
‘‘(2) 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 takes into account as investment
income under section 163(d)(4)(B)(iii).
‘‘(3) BASE
TAX
AMOUNT.—For purposes of
paragraph (1), the base tax amount is the lesser
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
adjusted net capital gain, or
‘‘(B) the sum of—
‘‘(i) a tax computed at the rates and
in the same manner as if this subsection
had not been enacted on the greater of—
‘‘(I) taxable income reduced by
the net capital gain, or
‘‘(II) the amount of taxable in-
come taxed at a rate below 28 per-
cent,
‘‘(ii) a tax of 26 percent of the lesser
of—
‘‘(I) the section 1250 gain, or
‘‘(II) the amount of taxable in-
come in excess of the sum of the
amount on which tax is determined
under clause (i) plus the net capital
gain determined without regard to
section 1250 gain, plus
‘‘(iii) a tax of 28 percent of the
amount of taxable income in excess of the
sum of—
‘‘(I) the adjusted net capital
gain, plus
‘‘(II) the sum of the amounts on
which tax is determined under clauses
(i) and (ii).
‘‘(4) ADJUSTED NET CAPITAL GAIN.—For pur-
poses of this subsection, the term ‘adjusted net cap-
ital gain’ means net capital gain determined without
regard to—
‘‘(A) collectibles gain,
‘‘(B) section 1202 gain, and
‘‘(C) section 1250 gain.
‘‘(5) COLLECTIBLES
GAIN.—For purposes of
paragraph (4)—
‘‘(A) IN GENERAL.—The term ‘collectibles
gain’ means gain from the sale or exchange of
a collectible (as defined in section 408(m) with-
out regard to paragraph (3) thereof) which is a
capital asset held for more than 1 year but only
to the extent such gain is taken into account in
computing gross income.
‘‘(B) 
COORDINATION
WITH
SECTION
1022.—Gain from the disposition of a collectible
which is an indexed asset to which section
1022(a) applies shall be disregarded for pur-
poses of this subsection. A taxpayer may elect
to treat any collectible specified in such election
as not being an indexed asset for purposes of
section 1022. Any such election, and any speci-
fication therein, once made, shall be irrevocable.
‘‘(C) PARTNERSHIPS, ETC.—For purposes
of subparagraph (A), any gain from the sale of
an interest in a partnership, S corporation, or
trust which is attributable to unrealized appre-
ciation in the value of collectibles shall be treat-
ed as gain from the sale or exchange of a col-
lectible. Rules similar to the rules of section
751 shall apply for purposes of the preceding
sentence.
‘‘(6) SECTION
1202
GAIN.—For purposes of
paragraph (4), the term ‘section 1202 gain’ means
gain from the sale or exchange of any qualified small
business stock (as defined in section 1202(c)) held
100
more than 5 years which is taken into account in
computing gross income.
‘‘(7) SECTION
1250
GAIN.—For purposes of
paragraph (4), the term ‘section 1250 gain’ means
the excess (if any) of—
‘‘(A) the amount which would be treated as
ordinary income under section 1245 if all sec-
tion 1250 property disposed of by the taxpayer
were section 1245 property, over
‘‘(B) the amount treated as ordinary in-
come under section 1250.
In the case of a taxable year which includes May 7,
1997, section 1250 gain shall be determined by tak-
ing into account only the gain properly taken into
account for the portion of the taxable year after May
6, 1997.
‘‘(8) PRE-EFFECTIVE DATE GAIN.—
‘‘(A) IN GENERAL.—In the case of a tax-
able year which includes May 7, 1997, adjusted
net capital gain shall be determined without re-
gard to pre-May 7, 1997, gain.
‘‘(B) PRE-MAY 7, 1997, GAIN.—The term
‘pre-May 7, 1997, gain’ means the amount
which would be adjusted net capital gain for the
taxable year if adjusted net capital gain were
101
determined by taking into account only the gain
or loss properly taken into account for the por-
tion of the taxable year before May 7, 1997.
‘‘(C) SPECIAL RULES FOR PASS-THRU EN-
TITIES.—In applying subparagraph (A) with re-
spect to any pass-thru entity, the determination
of when gains and loss are properly taken into
account shall be made at the entity level.
‘‘(D) PASS-THRU ENTITY DEFINED.—For
purposes of subparagraph (C), 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) MINIMUM TAX.—
(1) IN GENERAL.—Subsection (b) of section 55
is amended by adding at the end the following new
paragraph:
‘‘(3) MAXIMUM RATE OF TAX ON NET CAPITAL
GAIN OF NONCORPORATE TAXPAYERS.—The amount
determined under the first sentence of paragraph
(1)(A)(i) shall not exceed the sum of—
102
‘‘(A) the lesser of—
‘‘(i) the amount determined under
such first sentence computed at the rates
and in the same manner as if this para-
graph had not been enacted on the taxable
excess reduced by the adjusted net capital
gain (as defined in section 1(h)(4)), or
‘‘(ii) the sum of—
‘‘(I) 
the 
amount 
determined
under such first sentence computed at
the rates and in the same manner as
if this paragraph had not been en-
acted on the taxable excess reduced by
the sum of the adjusted net capital
gain (as so defined) and the section
1250 gain (as defined in section
1(h)(7)), plus
‘‘(II) 26 percent of the lesser of
the section 1250 gain (as so defined)
or the taxable excess reduced by the
adjusted net capital gain (as so de-
fined),
‘‘(B) a tax of 10 percent of so much of the
taxpayer’s adjusted net capital gain (or, if less,
taxable excess) as does not exceed the amount
103
on which a tax is determined under section
1(h)(1)(B), plus
‘‘(C) a tax of 20 percent of the taxpayer’s
adjusted net capital gain (or, if less, taxable ex-
cess) in excess of the amount on which tax is
determined under subparagraph (B).’’.
(2) CONFORMING AMENDMENT.—Clause (ii) of
section 55(b)(1)(A) is amended by striking ‘‘clause
(i)’’ and inserting ‘‘this subsection’’.
(c) OTHER CONFORMING AMENDMENTS.—
(1) Subsection (d) of section 291 is amended by
inserting at the end the following new sentence:
‘‘Any capital gain dividend treated as having been
paid out of such difference to a shareholder which
is not a corporation retains its characters as section
1250 gain for purposes of applying section 1(h) to
such shareholder.’’.
(2) Paragraph (1) of section 1445(e) is amend-
ed by striking ‘‘28 percent’’ and inserting ‘‘20 per-
cent’’.
(3) 
The 
second 
sentence 
of 
section
7518(g)(6)(A), and the second sentence of section
607(h)(6)(A) of the Merchant Marine Act, 1936, are
each amended by striking ‘‘28 percent’’ and insert-
ing ‘‘20 percent’’.
104
(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 May 6,
1997.
(2) WITHHOLDING.—The amendment made by
subsection (c)(2) shall apply only to amounts paid
after the date of the enactment of this Act.
(3) APPLICATION OF ESTIMATED TAX RULES.—
Clause (i) of section 6654(d)(1)(C) of the Internal
Revenue Code of 1986 shall be applied by substitut-
ing ‘‘109 percent’’ for ‘‘110 percent’’ where the pre-
ceding taxable year referred to in such clause is a
taxable year beginning in calendar year 1996.
(4) APPLICATION OF ESTIMATED TAX RULES
FOR 1998.—Clause (i) of section 6654(d)(1)(C) of
the Internal Revenue Code of 1986 shall be applied
by substituting ‘‘105 percent’’ for ‘‘110 percent’’
where the preceding taxable year referred to in such
clause is a taxable year beginning in calendar year
1997.
105
SEC. 312. INDEXING OF CERTAIN ASSETS ACQUIRED AFTER
DECEMBER 31, 2000, FOR PURPOSES OF DE-
TERMINING GAIN.
(a) IN GENERAL.—Part II of subchapter O of chap-
ter 1 (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
AFTER DECEMBER 31, 2000, 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 3 years, the indexed
basis of the asset shall be substituted for its ad-
justed basis.
‘‘(2) EXCEPTION
FOR
DEPRECIATION, ETC.—
The deductions for depreciation, depletion, and am-
ortization shall be determined without regard to the
application of paragraph (1) to the taxpayer or any
other person.
‘‘(3) 
EXCEPTION
FOR
PRINCIPAL
RESI-
DENCES.—Paragraph (1) shall not apply to any dis-
106
position of the principal residence (within the mean-
ing of section 121) of the taxpayer .
‘‘(b) INDEXED ASSET.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘indexed asset’ means—
‘‘(A) common stock in a C corporation
(other than a foreign corporation), and
‘‘(B) tangible property,
which is a capital asset or property used in the trade
or business (as defined in section 1231(b)).
‘‘(2) STOCK
IN
CERTAIN
FOREIGN
CORPORA-
TIONS INCLUDED.—For purposes of this section—
‘‘(A) IN
GENERAL.—The term ‘indexed
asset’ includes common stock in a foreign cor-
poration which is regularly traded on an estab-
lished securities market.
‘‘(B) 
EXCEPTION.—Subparagraph 
(A)
shall not apply to—
‘‘(i) stock of a foreign investment
company (within the meaning of section
1246(b)),
‘‘(ii) stock in a passive foreign invest-
ment company (as defined in section
1296),
107
‘‘(iii) stock in a foreign corporation
held by a United States person who meets
the requirements of section 1248(a)(2),
and
‘‘(iv) stock in a foreign personal hold-
ing company (as defined in section 552).
‘‘(C) TREATMENT OF AMERICAN DEPOSI-
TORY RECEIPTS.—An American depository re-
ceipt for common stock in a foreign corporation
shall be treated as common stock in such cor-
poration.
‘‘(c) INDEXED BASIS.—For purposes of this sec-
tion—
‘‘(1) GENERAL RULE.—The indexed basis for
any asset is—
‘‘(A) the adjusted basis of the asset, in-
creased by
‘‘(B) the applicable inflation adjustment.
‘‘(2) APPLICABLE INFLATION ADJUSTMENT.—
The applicable inflation adjustment for any asset is
an amount equal to—
‘‘(A) the adjusted basis of the asset, multi-
plied by
‘‘(B) the percentage (if any) by which—
108
‘‘(i) the chain-type price index for
GDP for the last calendar quarter ending
before the asset is disposed of, exceeds
‘‘(ii) the chain-type price index for
GDP for the last calendar quarter ending
before the asset was acquired by the tax-
payer.
The percentage under subparagraph (B) shall be
rounded to the nearest 1⁄10 of 1 percentage point.
‘‘(3) CHAIN-TYPE PRICE INDEX FOR GDP.—
The chain-type price index for GDP for any calendar
quarter is such index for such quarter (as shown in
the last revision thereof released by the Secretary of
Commerce before the close of the following calendar
quarter).
‘‘(d) SUSPENSION OF HOLDING PERIOD WHERE DI-
MINISHED
RISK
OF
LOSS; TREATMENT
OF
SHORT
SALES.—
‘‘(1) IN GENERAL.—If the taxpayer (or a relat-
ed person) enters into any transaction which sub-
stantially reduces the risk of loss from holding any
asset, such asset shall not be treated as an indexed
asset for the period of such reduced risk.
‘‘(2) SHORT SALES.—
109
‘‘(A) IN GENERAL.—In the case of a short
sale of an indexed asset with a short sale period
in excess of 3 years, for purposes of this title,
the amount realized shall be an amount equal
to the amount realized (determined without re-
gard to this paragraph) increased by the appli-
cable inflation adjustment. In applying sub-
section (c)(2) for purposes of the preceding sen-
tence, the date on which the property is sold
short shall be treated as the date of acquisition
and the closing date for the sale shall be treat-
ed as the date of disposition.
‘‘(B) SHORT SALE PERIOD.—For purposes
of subparagraph (A), the short sale period be-
gins on the day that the 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).
110
‘‘(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
‘‘(II) the amount treated as gain
by reason of the receipt of any capital
gain dividend shall be increased by the
percentage by which the entity’s net
capital gain for the taxable year (de-
termined without regard to this sec-
tion) exceeds the entity’s net capital
gain for such year determined with re-
gard to this section, and
‘‘(ii) there shall be other appropriate
adjustments (including deemed distribu-
tions) so as to ensure that the benefits of
this section are not allowed (directly or in-
directly) to corporate shareholders of quali-
fied investment entities.
111
For purposes of the preceding sentence, any
amount includible in gross income under section
852(b)(3)(D) shall be treated as a capital gain
dividend and an S corporation shall not be
treated as a corporation.
‘‘(C) 
EXCEPTION
FOR
QUALIFICATION
PURPOSES.—This section shall not apply for
purposes of sections 851(b) and 856(c).
‘‘(D) EXCEPTION FOR CERTAIN TAXES IM-
POSED AT ENTITY LEVEL.—
‘‘(i) TAX ON FAILURE TO DISTRIBUTE
ENTIRE GAIN.—If any amount is subject to
tax under section 852(b)(3)(A) for any
taxable year, the amount on which tax is
imposed under such section shall be in-
creased by the percentage determined
under subparagraph (B)(i)(II). A similar
rule shall apply in the case of any amount
subject to tax under paragraph (2) or (3)
of section 857(b) to the extent attributable
to the excess of the net capital gain over
the deduction for dividends paid deter-
mined with reference to capital gain divi-
dends only. The first sentence of this
clause shall not apply to so much of the
112
amount subject to tax under section
852(b)(3)(A) as is designated by the com-
pany under section 852(b)(3)(D).
‘‘(ii) OTHER
TAXES.—This section
shall not apply for purposes of determining
the amount of any tax imposed by para-
graph (4), (5), or (6) of section 857(b).
‘‘(2) ADJUSTMENTS
TO
INTERESTS
HELD
IN
ENTITY.—
‘‘(A) REGULATED
INVESTMENT
COMPA-
NIES.—Stock in a regulated investment com-
pany (within the meaning of section 851) shall
be an indexed asset for any calendar quarter in
the same ratio as—
‘‘(i) the average of the fair market
values of the indexed assets held by such
company at the close of each month during
such quarter, bears to
‘‘(ii) the average of the fair market
values of all assets held by such company
at the close of each such month.
‘‘(B) 
REAL
ESTATE
INVESTMENT
TRUSTS.—Stock in a real estate investment
trust (within the meaning of section 856) shall
113
be an indexed asset for any calendar quarter in
the same ratio as—
‘‘(i) the fair market value of the in-
dexed assets held by such trust at the close
of such quarter, bears to
‘‘(ii) the fair market value of all as-
sets held by such trust at the close of such
quarter.
‘‘(C) RATIO OF 80 PERCENT OR MORE.—If
the ratio for any calendar quarter determined
under subparagraph (A) or (B) would (but for
this subparagraph) be 80 percent or more, such
ratio for such quarter shall be 100 percent.
‘‘(D) RATIO OF 20 PERCENT OR LESS.—If
the ratio for any calendar quarter determined
under subparagraph (A) or (B) would (but for
this subparagraph) be 20 percent or less, such
ratio for such quarter shall be zero.
‘‘(E) LOOK-THRU OF PARTNERSHIPS.—For
purposes of this paragraph, a qualified invest-
ment entity which holds a partnership interest
shall be treated (in lieu of holding a partnership
interest) as holding its proportionate share of
the assets held by the partnership.
114
‘‘(3) TREATMENT OF RETURN OF CAPITAL DIS-
TRIBUTIONS.—Except as otherwise provided by the
Secretary, a distribution with respect to stock in a
qualified investment entity which is not a dividend
and which results in a reduction in the adjusted
basis of such stock shall be treated as allocable to
stock acquired by the taxpayer in the order in which
such stock was acquired.
‘‘(4) 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
115
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. 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.
‘‘(4) INDEXING ADJUSTMENT DISREGARDED IN
DETERMINING LOSS ON SALE OF INTEREST IN EN-
TITY.—Notwithstanding the preceding provisions of
118
periods 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) 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.
‘‘(5) 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:
119
‘‘Sec. 1022. Indexing of certain assets acquired after December
31, 2000, for purposes of determining gain.’’.
(c) EFFECTIVE DATES.—
(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, 2000.
(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, 2000, 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.
(d) ELECTION TO RECOGNIZE GAIN
ON ASSETS
HELD ON JANUARY 1, 2001.—For purposes of the Inter-
nal Revenue Code of 1986—
(1) IN GENERAL.—A taxpayer other than a cor-
poration may elect to treat—
120
(A) any readily tradable stock (which is an
indexed asset) held by such taxpayer on Janu-
ary 1, 2001, and not sold before the next busi-
ness day after such date, as having been sold
on such next business day for an amount equal
to its closing market price on such next busi-
ness day (and as having been reacquired on
such next business day for an amount equal to
such closing market price), and
(B) any other indexed asset held by the
taxpayer on January 1, 2001, as having been
sold on such date for an amount equal to its
fair market value on such date (and as having
been reacquired on such date for an amount
equal to such fair market value).
(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 date the asset is treated as
sold under paragraph (1) and shall be recog-
nized notwithstanding any provision of the In-
ternal Revenue Code of 1986.
(B) Any loss resulting from an election
under paragraph (1) shall not be allowed for
any taxable year.
121
(3) ELECTION.—An election under paragraph
(1) shall be made in such manner as the Secretary
of the Treasury or his delegate may prescribe and
shall specify the assets for which such election is
made. Such an election, once made with respect to
any asset, shall be irrevocable.
(4) READILY TRADABLE STOCK.—For purposes
of this subsection, the term ‘‘readily tradable stock’’
means any stock which, as of January 1, 2001, is
readily tradable on an established securities market
or otherwise.
SEC. 313. EXEMPTION FROM TAX FOR GAIN ON SALE OF
PRINCIPAL RESIDENCE.
(a) IN GENERAL.—Section 121 (relating to one-time
exclusion of gain from sale of principal residence by indi-
vidual who has attained age 55) is amended to read as
follows:
‘‘SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL
RESIDENCE.
‘‘(a) EXCLUSION.—Gross income shall not include
gain from the sale or exchange of property if, during the
5-year period ending on the date of the sale or exchange,
such property has been owned and used by the taxpayer
as the taxpayer’s principal residence for periods aggregat-
ing 2 years or more.
122
‘‘(b) LIMITATIONS.—
‘‘(1) DOLLAR
LIMITATION.—The amount of
gain excluded from gross income under subsection
(a) with respect to any sale or exchange shall not ex-
ceed $250,000 ($500,000 in the case of a joint re-
turn where both spouses meet the use requirement
of subsection (a)).
‘‘(2) APPLICATION
TO
ONLY
SALE
OR
EX-
CHANGE EVERY 2 YEARS.—
‘‘(A) IN
GENERAL.—Subsection (a) shall
not apply to any sale or exchange by the tax-
payer if, during the 2-year period ending on the
date of such sale or exchange, there was any
other sale or exchange by the taxpayer or his
spouse to which subsection (a) applied.
‘‘(B) PREMARRIAGE
SALES
BY
SPOUSE
NOT TAKEN INTO ACCOUNT.—If, but for this
subparagraph, subsection (a) would not apply
to a sale or exchange by a married individual
by reason of a sale or exchange by such individ-
ual’s spouse before their marriage—
‘‘(i) subparagraph (A) shall be applied
without regard to the sale or exchange by
such individual’s spouse, but
123
‘‘(ii) the amount of gain excluded
from gross income under subsection (a)
with respect to the sale or exchange by
such individual shall not exceed $250,000.
‘‘(C) PRE-MAY 7, 1997, SALES NOT TAKEN
INTO
ACCOUNT.—Subparagraph (A) shall be
applied without regard to any sale or exchange
before May 7, 1997.
‘‘(c) EXCLUSION FOR TAXPAYERS FAILING TO MEET
CERTAIN REQUIREMENTS.—
‘‘(1) IN GENERAL.—In the case of a sale or ex-
change to which this subsection applies, the owner-
ship and use requirements of subsection (a) shall not
apply and subsection (b)(2) shall not apply; but the
amount of gain excluded from gross income under
subsection (a) with respect to such sale of exchange
shall not exceed—
‘‘(A) the amount which bears the same
ratio to the amount which would be so excluded
if such requirements had been met, as
‘‘(B) the shorter of—
‘‘(i) the aggregate periods, during the
5-year period ending on the date of such
sale or exchange, such property has been
124
owned and used by the taxpayer as the
taxpayer’s principal residence, or
‘‘(ii) the period after the date of the
most recent prior sale or exchange by the
taxpayer or his spouse to which subsection
(a) applied and before the date of such sale
or exchange,
bears to 2 years.
‘‘(2) SALES AND EXCHANGES TO WHICH SUB-
SECTION APPLIES.—This subsection shall apply to
any sale or exchange if—
‘‘(A) subsection (a) would not (but for this
subsection) apply to such sale or exchange by
reason of—
‘‘(i) a failure to meet the ownership
and use requirements of subsection (a), or
‘‘(ii) subsection (b)(2), and
‘‘(B) such sale or exchange is by reason of
a change in place of employment, health, or, to
the extent provided in regulations, other unfore-
seen circumstances.
‘‘(d) SPECIAL RULES.—
‘‘(1) JOINT
RETURNS.—For purposes of this
section, if a husband and wife make a joint return
for the taxable year of the sale or exchange of the
125
property, subsection (a) shall, subject to the provi-
sions of subsection (b), apply if either spouse meets
the ownership and use requirements of subsection
(a) with respect to such property.
‘‘(2) PROPERTY OF DECEASED SPOUSE.—For
purposes of this section, in the case of an unmarried
individual whose spouse is deceased on the date of
the sale or exchange of property, the period such un-
married individual owned such property shall include
the period such deceased spouse held such property
before death.
‘‘(3) PROPERTY
OF
DIVORCED
SPOUSE.—For
purposes of this section, in the case of an individual
holding property transferred to such individual inci-
dent to divorce (within the meaning of section
1041(c))—
‘‘(A) the period such individual owns such
property shall include the period the former
spouse owned the property, and
‘‘(B) the dollar limitation applicable under
paragraph (1) shall not be less than the amount
such limitation would have been had the sale or
exchange occurred on the date the divorce be-
came final.
126
‘‘(4) TENANT-STOCKHOLDER IN COOPERATIVE
HOUSING CORPORATION.—For purposes of this sec-
tion, if the taxpayer holds stock as a tenant-stock-
holder (as defined in section 216) in a cooperative
housing corporation (as defined in such section),
then—
‘‘(A) the holding requirements of sub-
section (a) shall be applied to the holding of
such stock, and
‘‘(B) the use requirements of subsection
(a) shall be applied to the house or apartment
which the taxpayer was entitled to occupy as
such stockholder.
‘‘(5) INVOLUNTARY CONVERSIONS.—
‘‘(A) IN GENERAL.—For purposes of this
section, the destruction, theft, seizure, requisi-
tion, or condemnation of property shall be
treated as the sale of such property.
‘‘(B) APPLICATION OF SECTION 1033.—In
applying section 1033 (relating to involuntary
conversions), the amount realized from the sale
or exchange of property shall be treated as
being the amount determined without regard to
this section, reduced by the amount of gain not
127
included in gross income pursuant to this sec-
tion.
‘‘(C) PROPERTY ACQUIRED AFTER INVOL-
UNTARY
CONVERSION.—If the basis of the
property sold or exchanged is determined (in
whole or in part) under section 1033(b) (relat-
ing to basis of property acquired through invol-
untary conversion), then the holding and use by
the taxpayer of the converted property shall be
treated as holding and use by the taxpayer of
the property sold or exchanged.
‘‘(6) RECOGNITION OF GAIN ATTRIBUTABLE TO
DEPRECIATION.—Subsection (a) shall not apply to
so much of the gain from the sale of any property
as does not exceed the portion of the depreciation
adjustments (as defined in section 1250(b)(3)) at-
tributable to periods after May 6, 1997, in respect
of such property.
‘‘(7) DETERMINATION OF USE DURING PERIODS
OF OUT-OF-RESIDENCE CARE.—In the case of a tax-
payer who—
‘‘(A) becomes physically or mentally in-
capable of self-care, and
‘‘(B) owns property and uses such property
as the taxpayer’s principal residence during the
128
5-year period described in subsection (a) for pe-
riods aggregating at least 1 year,
then the taxpayer shall be treated as using such
property as the taxpayer’s principal residence during
any time during such 5-year period in which the tax-
payer owns the property and resides in any facility
(including a nursing home) licensed by a State or
political subdivision to care for an individual in the
taxpayer’s condition.
‘‘(8) DETERMINATION OF MARITAL STATUS.—
In the case of any sale or exchange, for purposes of
this section—
‘‘(A) the determination of whether an indi-
vidual is married shall be made as of the date
of the sale or exchange, and
‘‘(B) an individual legally separated from
his spouse under a decree of divorce or of sepa-
rate maintenance shall not be considered as
married.
‘‘(9) SALES OF LIFE ESTATES AND REMAINDER
INTERESTS.—For purposes of this section—
‘‘(A) IN GENERAL.—This section shall not
fail to apply to the sale or exchange of an inter-
est in a principal residence by reason of such
interest being a life estate or a remainder inter-
129
est in such residence, but this section shall
apply only to one such interest in such resi-
dence which is sold or exchanged separately.
‘‘(B) EXCEPTION FOR SALES TO RELATED
PARTIES.—Subparagraph (A) shall not apply to
any sale to, or exchange with, any person who
bears a relationship to the taxpayer which is de-
scribed in section 267(b) or 707(b).
‘‘(e) DENIAL OF EXCLUSION FOR EXPATRIATES.—
This section shall not apply to any sale or exchange by
an individual if the treatment provided by section
877(a)(1) applies to such individual.
‘‘(f) ELECTION TO HAVE SECTION NOT APPLY.—
This section shall not apply to any sale or exchange with
respect to which the taxpayer elects not to have this sec-
tion apply.
‘‘(g) RESIDENCES ACQUIRED IN ROLLOVERS UNDER
SECTION 1034.—For purposes of this section, in the case
of property the acquisition of which by the taxpayer re-
sulted under section 1034 (as in effect on the day before
the date of the enactment of this sentence) in the non-
recognition of any part of the gain realized on the sale
or exchange of another residence, in determining the pe-
riod for which the taxpayer has owned and used such
property as the taxpayer’s principal residence, there shall
130
be included the aggregate periods for which such other
residence (and each prior residence taken into account
under section 1223(7) in determining the holding period
of such property) had been so owned and used.’’.
(b) REPEAL
OF NONRECOGNITION
OF GAIN
ON
ROLLOVER
OF PRINCIPAL RESIDENCE.—Section 1034
(relating to rollover of gain on sale of principal residence)
is hereby repealed.
(c) CONFORMING AMENDMENTS.—
(1) The following provisions of the Internal
Revenue Code of 1986 are each amended by striking
‘‘section 1034’’ and inserting ‘‘section 121’’: sections
25(e)(7), 
56(e)(1)(A), 
56(e)(3)(B)(i),
143(i)(1)(C)(i)(I), 
163(h)(4)(A)(i)(I),
280A(d)(4)(A), 
464(f)(3)(B)(i), 
1033(h)(4),
1274(c)(3)(B), 6334(a)(13), and 7872(f)(11)(A).
(2) Paragraph (4) of section 32(c) is amended
by striking ‘‘(as defined in section 1034(h)(3))’’ and
by adding at the end the following new sentence:
‘‘For purposes of the preceding sentence, the term
‘extended active duty’ means any period of active
duty pursuant to a call or order to such duty for a
period in excess of 90 days or for an indefinite pe-
riod.’’.
131
(3) Subparagraph (A) of 143(m)(6) is amended
by inserting ‘‘(as in effect on the day before the date
of the enactment of the Taxpayer Relief Act of
1997)’’ after ‘‘1034(e)’’.
(4) Subsection (e) of section 216 is amended by
striking ‘‘such exchange qualifies for nonrecognition
of gain under section 1034(f)’’ and inserting ‘‘such
dwelling unit is used as his principal residence (with-
in the meaning of section 121)’’.
(5) Section 512(a)(3)(D) is amended by insert-
ing ‘‘(as in effect on the day before the date of the
enactment of the Taxpayer Relief Act of 1997)’’
after ‘‘1034’’.
(6) Paragraph (7) of section 1016(a) is amend-
ed by inserting ‘‘(as in effect on the day before the
date of the enactment of the Taxpayer Relief Act of
1997)’’ after ‘‘1034’’ and by inserting ‘‘(as so in ef-
fect)’’ after ‘‘1034(e)’’.
(7) Paragraph (3) of section 1033(k) is amend-
ed to read as follows:
‘‘(3) For exclusion from gross income of gain
from involuntary conversion of principal residence,
see section 121.’’.
(8) Subsection (e) of section 1038 is amended
to read as follows:
132
‘‘(e) PRINCIPAL RESIDENCES.—If—
‘‘(1) subsection (a) applies to a reacquisition of
real property with respect to the sale of which gain
was not recognized under section 121 (relating to
gain on sale of principal residence); and
‘‘(2) within 1 year after the date of the reacqui-
sition of such property by the seller, such property
is resold by him,
then, under regulations prescribed by the Secretary, sub-
sections (b), (c), and (d) of this section shall not apply
to the reacquisition of such property and, for purposes of
applying section 121, the resale of such property shall be
treated as a part of the transaction constituting the origi-
nal sale of such property.’’.
(9) Paragraph (7) of section 1223 is amended
by inserting ‘‘(as in effect on the day before the date
of the enactment of the Taxpayer Reief Act of
1997)’’ after ‘‘1034’’.
(10) Paragraph (7) of section 1250(d) is
amended to read as follows:
‘‘(7) DISPOSITION OF PRINCIPAL RESIDENCE.—
Subsection (a) shall not apply to a disposition of
property to the extent used by the taxpayer as his
principal residence (within the meaning of section
133
121, relating to gain on sale of principal resi-
dence).’’.
(11) Subsection (c) of section 6012 is amended
by striking ‘‘(relating to one-time exclusion of gain
from sale of principal residence by individual who
has attained age 55)’’ and inserting ‘‘(relating to
gain from sale of principal residence)’’.
(12) Paragraph (2) of section 6212(c) is
amended by striking subparagraph (C) and by redes-
ignating the succeeding subparagraphs accordingly.
(13) Section 6504 is amended by striking para-
graph (4) and by redesignating the succeeding para-
graphs accordingly.
(14) The item relating to section 121 in the
table of sections for part III of subchapter B of
chapter 1 is amended to read as follows:
‘‘Sec. 121. Exclusion of gain from sale of principal residence.’’.
(15) The table of sections for part III of sub-
chapter O of chapter 1 of such Code is amended by
striking the item relating to section 1034.
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to sales and exchanges after
May 6, 1997.
(2) SALES BEFORE DATE OF ENACTMENT.—At
the election of the taxpayer, the amendments made
134
by this section shall not apply to any sale or ex-
change before the date of the enactment of this Act.
(3) BINDING CONTRACTS.—At the election of
the taxpayer, the amendments made by this section
shall not apply to a sale or exchange after the date
of the enactment of this Act, if—
(A) such sale or exchange is pursuant to a
contract which was binding on such date, or
(B) without regard to such amendments,
gain would not be recognized under section
1034 of the Internal Revenue Code of 1986 (as
in effect on the day before the date of the en-
actment of this Act) on such sale or exchange
by reason of a new residence acquired on or be-
fore such date or with respect to the acquisition
of which by the taxpayer a binding contract was
in effect on such date.
This paragraph shall not apply to any sale or ex-
change by an individual if the treatment provided by
section 877(a)(1) of the Internal Revenue Code of
1986 applies to such individual.
135
PART II—CORPORATE CAPITAL GAINS
SEC. 321. REDUCTION OF ALTERNATIVE CAPITAL GAIN TAX
FOR CORPORATIONS.
(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 8-year gain, then, in lieu of the tax imposed
by sections 11, 511, and 831 (a) and (b) (whichever 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 8-year gain, at the rates
and in the manner as if this subsection had not been
enacted, plus
‘‘(2) a tax of the applicable percentage of the
amount of the 8-year gain (or, if less, taxable in-
come).
‘‘(b) APPLICABLE PERCENTAGE.—For purposes of
subsection (a)—
‘‘(1) IN GENERAL.—The term ‘applicable per-
centage’ means—
‘‘(A) 32 percent for the portion of any tax-
able year within 1998,
136
‘‘(B) 31 percent for the portion of any tax-
able year within 1999, and
‘‘(C) 30 percent for the portion of any tax-
able year after 1999.
‘‘(2) FISCAL YEAR TAXPAYERS.—
‘‘(A) TAXABLE
YEARS
BEGINNING
IN
1997.—In applying this section to taxable years
beginning in 1997, 8-year gain shall not exceed
the 8-year gain determined by taking into ac-
count only gains and losses properly taken into
account for the portion of the taxable year after
December 31, 1997.
‘‘(B) TAXABLE YEARS BEGINNING IN 1998
OR 1999.—In the case of a taxable year begin-
ning in 1998 or 1999 which includes portions
of 2 calendar years, the applicable percentage
shall be applied separately to such portions by
taking into account—
‘‘(i) in the case of the first such por-
tion, the lesser of—
‘‘(I) the 8-year gain determined
by taking into account only gains and
losses properly taken into account for
such portion, or
137
‘‘(II) the 8-year gain determined
for the entire taxable year, and
‘‘(ii) in the case of the second such
portion, the 8-year gain (and the taxable
income) determined for the entire taxable
year reduced by the amount on which tax
is determined under subsection (a)(2) for
the first such portion determined under
clause (i).
‘‘(C) SPECIAL RULE FOR PASS-THRU ENTI-
TIES.—Section 1(h)(8)(C) shall apply for pur-
poses of this paragraph.
‘‘(c) 8-YEAR GAIN.—For purposes of this section, the
term ‘8-year gain’ means the lesser of—
‘‘(1) the amount of long-term capital gain
which would be computed for the taxable year if only
gain from the sale or exchange of property held by
the taxpayer for more than 8 years were taken into
account, or
‘‘(2) net capital gain.
The determination under the preceding sentence shall be
made without regard to collectibles gain (as defined in sec-
tion 1(h)(5)) or section 1250 gain (as defined in section
1(h)(7)).
138
‘‘(d) 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) TECHNICAL AMENDMENTS.—
(1) Subsection (d) of section 291 is amended by
striking ‘‘subsection (a)(1) to such shareholder’’ and
inserting ‘‘subsection (a)(1) and section 1201 to
such shareholder’’.
(2) Clause (iii) of section 852(b)(3)(D) is
amended by striking ‘‘65 percent’’ and inserting
‘‘the applicable percentage’’ and by inserting at the
end the following new sentence: ‘‘For purposes of
the preceding sentence, the term ‘applicable percent-
age’ means the percentage equal to the excess of 100
percent over the percentage applicable under section
1201(a).’’.
(3)(A) Subparagraph (B) of section 852(b)(3)
is amended to read as follows:
‘‘(B) TREATMENT OF CAPITAL GAIN DIVI-
DENDS BY SHAREHOLDERS.—
‘‘(i) IN
GENERAL.—Except as pro-
vided in clause (ii), a capital gain dividend
shall be treated by the shareholders as
139
gain from the sale or exchange of a capital
asset held for more than 1 year.
‘‘(ii) COORDINATION
WITH
8-YEAR
HOLDING
PERIOD
FOR
CORPORATE
NET
CAPITAL GAIN.—The portion of any capital
gain dividend designated by the company
as allocable to gain from the sale or ex-
change of property held by the company
for more than 8 years shall be treated as
gain from the sale or exchange of a capital
asset held for more than 8 years. Rules
similar to the rules of subparagraph (C)
shall apply to any designation under the
preceding sentence.’’.
(B) Clause (i) of section 851(b)(3)(D) is
amended by adding at the end thereof the following
new sentence: ‘‘Rules similar to the rules of subpara-
graph (B) shall apply in determining character of
the amount to be so included by any such share-
holder which is a corporation.’’.
(4) Subparagraph (B) of section 857(b)(3) is
amended to read as follows:
‘‘(B) TREATMENT OF CAPITAL GAIN DIVI-
DENDS BY SHAREHOLDERS.—
140
‘‘(i) IN
GENERAL.—Except as pro-
vided in clause (ii), a capital gain dividend
shall be treated by the shareholders or
holders of beneficial interests as gain from
the sale or exchange of a capital asset held
for more than 1 year.
‘‘(ii) COORDINATION
WITH
8-YEAR
HOLDING
PERIOD
FOR
CORPORATE
NET
CAPITAL GAIN.—The portion of any capital
gain dividend designated by the company
as allocable to gain from the sale or ex-
change of property held by the company
for more than 8 years shall be treated as
gain from the sale or exchange of a capital
asset held for more than 8 years. Rules
similar to the rules of subparagraph (C)
shall apply to any designation under the
preceding sentence.’’.
(5) Subsection (c) of section 584 is amended—
(A) by inserting ‘‘but not more than 8
years’’ after ‘‘1 year’’ each place it appears in
paragraph (2),
(B) by striking ‘‘and’’ at the end of para-
graph (2), and
141
(C) by redesignating paragraph (3) as
paragraph (4) and inserting after paragraph
(2) the following new paragraph:
‘‘(3) as part of its gains and losses from sales
or exchanges of capital assets held for more than 8
years, its proportionate share of the gains and losses
of the common trust fund from sales or exchanges
of capital assets held for more than 8 years, and’’.
(6) Subparagraph (E) of section 904(b)(3) is
amended by adding at the end the following new
clause:
‘‘(iv) REGULATIONS.—The Secretary
shall prescribe regulations that adjust the
limitation under subsection (a) to reflect
the rate differential for 8-year gain (as de-
fined in section 1201(c)) between the high-
est rate of tax specified in section 11(b)
and the alternate rate of tax under section
1201(a) and the limitation on the deduc-
tion for capital losses under section
1211.’’.
(c) EFFECTIVE DATES.—The amendments made by
this section shall apply to taxable years ending after De-
cember 31, 1997.
142
TITLE IV—ALTERNATIVE
MINIMUM TAX REFORM
SEC. 401. ADJUSTMENT OF EXEMPTION AMOUNTS FOR TAX-
PAYERS OTHER THAN CORPORATIONS.
(a) IN GENERAL.—Subsection (d) of section 55 is
amended by adding at the end the following new para-
graph:
‘‘(4) ADJUSTMENT
OF
EXEMPTION
AMOUNTS
FOR TAXPAYERS OTHER THAN CORPORATIONS.—
‘‘(A) TAXABLE YEARS BEGINNING BEFORE
JANUARY 1, 2008.—In the case of any taxable
year beginning in a calendar year after 1998
and before 2008—
‘‘(i) IN GENERAL.—The dollar amount
applicable under paragraph (1)(A) for any
odd-numbered calendar year—
‘‘(I) shall be $1,000 greater than
the dollar amount applicable under
paragraph (1)(A) for the prior odd-
numbered calendar year, and
‘‘(II) shall apply to taxable years
beginning in such odd-numbered cal-
endar year and the succeeding cal-
endar year.
143
‘‘(B) TAXABLE YEARS BEGINNING AFTER
DECEMBER 31, 2007.—In the case of any taxable
year beginning in a calendar year after 2007,
the dollar amount applicable under paragraph
(1)(A) for taxable years beginning in 2007 shall
be increased by an amount equal to the product
of—
‘‘(i) such dollar amount, and
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) for the cal-
endar year in which the taxable year be-
gins, determined by substituting ‘calendar
year 2006’ for ‘calendar year 1992’ in sub-
paragraph (B) thereof.
If any increase determined under the preceding
sentence is not a multiple of $100, such in-
crease shall be rounded to the next lowest mul-
tiple of $100.
‘‘(C) OTHER AMOUNTS.—
‘‘(i) The dollar amount applicable
under paragraph (1)(B) for any taxable
year shall be an amount equal to 75 per-
cent of the dollar amount applicable under
paragraph (1)(A) for such year.
144
‘‘(ii) The dollar amount applicable
under paragraph (1)(C) for any taxable
year shall be an amount equal to 50 per-
cent of the dollar amount applicable under
paragraph (1)(A) for such year.’’.
(b) CONFORMING AMENDMENT.—The last sentence
of section 55(d)(3) is amended by striking ‘‘$165,000 or
(ii) $22,500’’ and inserting ‘‘the minimum amount of such
income (as so determined) for which the exemption
amount under paragraph (1)(C) is zero, or (ii) such ex-
emption amount (determined without regard to this para-
graph)’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1998.
SEC. 402. EXEMPTION FROM ALTERNATIVE MINIMUM TAX
FOR SMALL CORPORATIONS.
(a) IN GENERAL.—Section 55 (relating to alternative
minimum tax imposed) is amended by adding at the end
the following new subsection:
‘‘(e) EXEMPTION FOR SMALL CORPORATIONS.—
‘‘(1) IN GENERAL.—The tentative minimum tax
of a corporation shall be zero for any taxable year
if—
145
‘‘(A) such corporation met the $5,000,000
gross receipts test of section 448(c) for any
prior taxable year beginning after December 31,
1996, and
‘‘(B) such corporation would meet such
test for the taxable year and all prior taxable
years beginning after December 31, 1997, if
such 
test 
were 
applied 
by 
substituting
‘$7,500,000’ for ‘$5,000,000’
‘‘(2) PROSPECTIVE APPLICATION OF MINIMUM
TAX
IF
SMALL
CORPORATION
CEASES
TO
BE
SMALL.—In the case of a corporation whose ten-
tative minimum tax is zero for any prior taxable
year by reason of paragraph (1), the application of
this part for taxable years beginning with the first
taxable year such corporation ceases to be described
in paragraph (1) shall be determined without regard
to transactions entered into or other items arising in
taxable years prior to such first taxable year.
‘‘(3) LIMITATION
ON
USE
OF
CREDIT
FOR
PRIOR YEAR MINIMUM TAX LIABILITY.—In the case
of a taxpayer whose tentative minimum tax for any
taxable year is zero by reason of paragraph (1), the
amount described in paragraph (2) of section 53(b)
shall not be less than the greater of—
146
‘‘(A) the tentative minimum tax for the
taxable year, or
‘‘(B) 25 percent of so much of the regular
tax liability (reduced by the credit allowed by
section 27) as exceeds $25,000.
Rules similar to the rules of section 38(c)(3)(B)
shall apply for purposes of the preceding sentence.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 403. REPEAL OF ADJUSTMENT FOR DEPRECIATION.
(a) IN GENERAL.—Clause (i) of section 56(a)(1)(A)
is amended by inserting ‘‘and before January 1, 1999,’’
after ‘‘December 31, 1986,’’.
(b) STUDY.—
(1) IN GENERAL.—Because it is the intent of
Congress that the amendment made by subsection
(a) not have the result of permitting any corporation
with taxable income from current year operations to
pay no Federal income tax, the Secretary of the
Treasury or his delegate shall conduct a study to de-
termine whether such amendment has that result
and, if so, the policy implications of that result.
(2) REPORT.—The report of such study shall be
submitted to the Committee on Ways and Means of
147
the House of Representatives and the Committee on
Finance of the Senate not later than January 1,
2001.
SEC. 404. MINIMUM TAX NOT TO APPLY TO FARMERS’ IN-
STALLMENT SALES.
(a) IN GENERAL.—The last sentence of paragraph
(6) of section 56(a) (relating to treatment of installment
sales in computing alternative minimum taxable income)
is amended to read as follows: ‘‘This paragraph shall not
apply to any disposition—
‘‘(A) in the case of a taxpayer using the
cash receipts and disbursements method of ac-
counting, described in section 453(l)(2)(A) (re-
lating to farm property), or
‘‘(B) with respect to which an election is in
effect under section 453(l)(2)(B) (relating to
timeshares and residential lots).’’.
(b) EFFECTIVE DATES.—
(1) IN
GENERAL.—The amendment made by
this section shall apply to dispositions in taxable
years beginning after December 31, 1987.
(2) SPECIAL RULE FOR 1987.—In the case of
taxable years beginning in 1987, the last sentence of
section 56(a)(6) of the Internal Revenue Code of
1986 (as in effect for such taxable years) shall be
148
applied by inserting ‘‘or in the case of a taxpayer
using the cash receipts and disbursements method of
accounting, any disposition described in section
453C(e)(1)(B)(ii)’’ after ‘‘section 453C(e)(4)’’.
TITLE 
V—ESTATE, 
GIFT, 
AND
GENERATION-SKIPPING 
TAX
PROVISIONS
Subtitle A—Estate and Gift Tax
Provisions
SEC. 501. COST-OF-LIVING ADJUSTMENTS RELATING TO ES-
TATE AND GIFT TAX PROVISIONS.
(a) INCREASE IN UNIFIED ESTATE AND GIFT TAX
CREDIT.—
(1) ESTATE TAX CREDIT.—
(A) IN GENERAL.—Subsection (a) of sec-
tion 2010 (relating to unified credit against es-
tate tax) is amended by striking ‘‘$192,800’’
and inserting ‘‘the applicable credit amount’’.
(B) APPLICABLE
CREDIT
AMOUNT.—Sec-
tion 2010 is amended by redesignating sub-
section (c) as subsection (d) and by inserting
after subsection (b) the following new sub-
section:
‘‘(c) APPLICABLE CREDIT AMOUNT.—For purposes
of this section—
149
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, 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 the applicable exclusion amount
determined in accordance with the following table:
‘‘In the case of estates of decedents
The applicable
dying, and gifts made, during:
exclusion amount is:
1998 .......................................................................
$ 650,000
1999 .......................................................................
$ 750,000
2000 .......................................................................
$ 765,000
2001 through 2004 ...............................................
$ 775,000
2005 .......................................................................
$ 800,000
2006 .......................................................................
$ 825,000
2007 or thereafter .................................................
$1,000,000.
‘‘(2) COST-OF-LIVING
ADJUSTMENT.—In the
case of any decedent dying, and gift made, in a cal-
endar year after 2007, the $1,000,000 amount set
forth in paragraph (1) shall be increased by an
amount equal to—
‘‘(A) $1,000,000, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for such calendar
year by substituting ‘calendar year 2006’ for
‘calendar year 1992’ in subparagraph (B)
thereof.
If any amount as adjusted under the preceding sen-
tence is not a multiple of $10,000, such amount
150
shall be rounded to the next lowest multiple of
$10,000.’’.
(C) ESTATE
TAX
RETURNS.—Paragraph
(1) of section 6018(a) is amended by striking
‘‘$600,000’’ and inserting ‘‘the applicable exclu-
sion amount in effect under section 2010(c) for
the calendar year which includes the date of
death’’.
(D) PHASEOUT
OF
GRADUATED
RATES
AND UNIFIED CREDIT.—Paragraph (2) of sec-
tion 
2001(c) 
is 
amended 
by 
striking
‘‘$21,040,000’’ and inserting ‘‘the amount at
which the average tax rate under this section is
55 percent’’.
(E) ESTATES OF NONRESIDENTS NOT CITI-
ZENS.—Subparagraph (A) of section 2102(c)(3)
is amended by striking ‘‘$192,800’’ and insert-
ing ‘‘the applicable credit amount in effect
under section 2010(c) for the calendar year
which includes the date of death’’.
(2) UNIFIED
GIFT
TAX
CREDIT.—Paragraph
(1) of section 2505(a) is amended by striking
‘‘$192,800’’ and inserting ‘‘the applicable credit
amount in effect under section 2010(c) for such cal-
endar year’’.
151
(b) ALTERNATE VALUATION
OF CERTAIN FARM,
ETC., REAL PROPERTY.—Subsection (a) of section 2032A
is amended by adding at the end the following new para-
graph:
‘‘(3) INFLATION ADJUSTMENT.—In the case of
estates of decedents dying in a calendar year after
1998, the $750,000 amount contained in paragraph
(2) shall be increased by an amount equal to—
‘‘(A) $750,000, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for such calendar
year by substituting ‘calendar year 1997’ for
‘calendar year 1992’ in subparagraph (B)
thereof.
If any amount as adjusted under the preceding sen-
tence is not a multiple of $10,000, such amount
shall be rounded to the next lowest multiple of
$10,000.’’.
(c) ANNUAL GIFT TAX EXCLUSION.—Subsection (b)
of section 2503 is amended—
(1) by striking the subsection heading and in-
serting the following:
‘‘(b) EXCLUSIONS FROM GIFTS.—
‘‘(1) IN GENERAL.—’’,
(2) by moving the text 2 ems to the right, and
152
(3) by adding at the end the following new
paragraph:
‘‘(2) INFLATION ADJUSTMENT.—In the case of
gifts made in a calendar year after 1998, the
$10,000 amount contained in paragraph (1) shall be
increased by an amount equal to—
‘‘(A) $10,000, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for such calendar
year by substituting ‘calendar year 1997’ for
‘calendar year 1992’ in subparagraph (B)
thereof.
If any amount as adjusted under the preceding sen-
tence is not a multiple of $1,000, such amount shall
be rounded to the next lowest multiple of $1,000.’’.
(d) 
EXEMPTION
FROM
GENERATION-SKIPPING
TAX.—Section 2631 (relating to GST exemption) is
amended by adding at the end the following new sub-
section:
‘‘(c) INFLATION ADJUSTMENT.—In the case of an in-
dividual who dies in any calendar year after 1998, the
$1,000,000 amount contained in subsection (a) shall be
increased by an amount equal to—
‘‘(1) $1,000,000, multiplied by
153
‘‘(2) the cost-of-living adjustment determined
under section 1(f)(3) for such calendar year by sub-
stituting ‘calendar year 1997’ for ‘calendar year
1992’ in subparagraph (B) thereof.
If any amount as adjusted under the preceding sentence
is not a multiple of $10,000, such amount shall be round-
ed to the next lowest multiple of $10,000.’’.
(e) AMOUNT SUBJECT TO REDUCED RATE WHERE
EXTENSION OF TIME FOR PAYMENT OF ESTATE TAX ON
CLOSELY HELD BUSINESS.—Subsection (j) of section
6601 is amended by redesignating paragraph (3) as para-
graph (4) and by inserting after paragraph (2) the follow-
ing new paragraph:
‘‘(3) INFLATION ADJUSTMENT.—In the case of
estates of decedents dying in a calendar year after
1998, the $1,000,000 amount contained in para-
graph (2)(A) shall be increased by an amount equal
to—
‘‘(A) $1,000,000, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for such calendar
year by substituting ‘calendar year 1997’ for
‘calendar year 1992’ in subparagraph (B)
thereof.
154
If any amount as adjusted under the preceding sen-
tence is not a multiple of $10,000, such amount
shall be rounded to the next lowest multiple of
$10,000.’’.
(f) EFFECTIVE DATE.—The amendments made by
this section shall apply to the estates of decedents dying,
and gifts made, after December 31, 1997.
SEC. 502. 20-YEAR INSTALLMENT PAYMENT WHERE ESTATE
CONSISTS LARGELY OF INTEREST IN CLOSE-
LY HELD BUSINESS.
(a) IN GENERAL.—Section 6166(a) (relating to ex-
tension of time for payment of estate tax where estate con-
sists largely of interest in closely held business) is amend-
ed by striking ‘‘10’’ in paragraph (1) and the heading
thereof and inserting ‘‘20’’.
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to estates of decedents dying after
December 31, 1997.
SEC. 503. NO INTEREST ON CERTAIN PORTION OF ESTATE
TAX EXTENDED UNDER SECTION 6166, RE-
DUCED INTEREST ON REMAINING PORTION,
AND NO DEDUCTION FOR SUCH REDUCED IN-
TEREST.
(a) NO INTEREST AND REDUCED INTEREST.—
167
the amount of the credit allowable by subsection (a) to
the estate of the decedent shall be increased by the amount
of the unified credit allowed against the tax imposed by
section 2501 on the amount of such gift considered under
section 2513 as made by such spouse.’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to gifts made after the date of
the enactment of this Act.
SEC. 509. REFORMATION OF DEFECTIVE BEQUESTS, ETC.,
TO SPOUSE OF DECEDENT.
(a) IN GENERAL.—Subsection (b) of section 2056
(relating to bequests, etc., to surviving spouse) is amended
by adding at the end the following new paragraph:
‘‘(11) REFORMATIONS PERMITTED.—
‘‘(A) IN GENERAL.—In the case of any in-
terest in property with respect to which a de-
duction would be allowable under subsection (a)
but for a provision of this subsection, if—
‘‘(i) the surviving spouse is entitled to
all of the income from the property for life,
‘‘(ii) no person other than such spouse
is entitled to any distribution of such prop-
erty during such spouse’s life, and
‘‘(iii) there is a change of a governing
instrument (by reformation, amendment,
704
(5) Paragraph (4) of section 4975(d) is amend-
ed by striking ‘‘if, with respect to such transaction’’
and all that follows and inserting the following: ‘‘if
section 220(e)(2) applies to such transaction.’’.
(b) AMENDMENT RELATED TO SECTION 321.—Sub-
paragraph (B) of section 7702B(c)(2) is amended in the
last sentence by inserting ‘‘described in subparagraph
(A)(i)’’ after ‘‘chronically ill individual’’.
(c) AMENDMENT RELATED TO SECTION 322.—Sub-
paragraph (B) of section 162(l)(2) is amended by adding
at the end the following new sentence: ‘‘The preceding sen-
tence shall be applied separately with respect to—
‘‘(i) plans which include coverage for
qualified long-term care services (as de-
fined in section 7702B(c)) or are qualified
long-term care insurance contracts (as de-
fined in section 7702B(b)), and
‘‘(ii) plans which do not include such
coverage and are not such contracts.’’.
(d) AMENDMENTS RELATED TO SECTION 323.—
(1) Paragraph (1) of section 6050Q(b) is
amended by inserting ‘‘, address, and phone number
of the information contact’’ after ‘‘name’’.
(2)(A) Paragraph (2) of section 6724(d) is
amended by striking so much as follows subpara-