‘‘(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 
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. 
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‘‘(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. 
‘‘(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. 
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‘‘(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 
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 
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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 ENTI-
TY.—Notwithstanding the preceding provisions of 
this subsection, for purposes of determining the 
amount of any loss on a sale or exchange of an in-
terest in a partnership, S corporation, or common 
trust fund, the adjustment made under subsection 
(a) shall not be taken into account in determining 
the adjusted basis of such interest. 
‘‘(g) DISPOSITIONS BETWEEN RELATED PERSONS.— 
‘‘(1) IN GENERAL.—This section shall not apply 
to any sale or other disposition of property between 
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related persons except to the extent that the basis 
of such property in the hands of the transferee is a 
substituted basis. 
‘‘(2) RELATED PERSONS DEFINED.—For pur-
poses of this section, the term ‘related persons’ 
means— 
‘‘(A) persons bearing a relationship set 
forth in section 267(b), and 
‘‘(B) persons treated as single employer 
under subsection (b) or (c) of section 414. 
‘‘(h) TRANSFERS TO INCREASE INDEXING ADJUST-
MENT.—If any person transfers cash, debt, or any other 
property to another person and the principal purpose of 
such transfer is to secure or increase an adjustment under 
subsection (a), the Secretary may disallow part or all of 
such adjustment or increase. 
‘‘(i) SPECIAL RULES.—For purposes of this section— 
‘‘(1) TREATMENT OF IMPROVEMENTS, ETC.—If 
there is an addition to the adjusted basis of any tan-
gible property or of any stock in a corporation dur-
ing the taxable year by reason of an improvement to 
such property or a contribution to capital of such 
corporation— 
‘‘(A) such addition shall never be taken 
into account under subsection (c)(1)(A) if the 
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aggregate amount thereof during the taxable 
year with respect to such property or stock is 
less than $1,000, and 
‘‘(B) such addition shall be treated as a 
separate asset acquired at the close of such tax-
able year if the aggregate amount thereof dur-
ing the taxable year with respect to such prop-
erty or stock is $1,000 or more. 
A rule similar to the rule of the preceding sentence 
shall apply to any other portion of an asset to the 
extent that separate treatment of such portion is ap-
propriate to carry out the purposes of this section. 
‘‘(2) ASSETS WHICH ARE NOT INDEXED ASSETS 
THROUGHOUT HOLDING PERIOD.—The applicable in-
flation adjustment shall be appropriately reduced for 
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) 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-
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nary loss to which any other provision of this title 
applies, such provision shall not apply. The taxpayer 
shall be treated as having a long-term capital loss in 
an amount equal to the amount of the ordinary loss 
to which the preceding sentence applies. 
‘‘(5) ACQUISITION
DATE
WHERE
THERE
HAS 
BEEN
PRIOR
APPLICATION
OF
SUBSECTION (a)(1) 
WITH RESPECT TO THE TAXPAYER.—If there has 
been a prior application of subsection (a)(1) to an 
asset while such asset was held by the taxpayer, the 
date of acquisition of such asset by the taxpayer 
shall be treated as not earlier than the date of the 
most recent such prior application. 
‘‘(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 striking the item relating to section 1023 
and by inserting after the item relating to section 1022 
the following new item: 
‘‘Sec. 1023. Indexing of certain assets for purposes of determining gain or loss. 
‘‘Sec. 1024. Cross references.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to indexed assets acquired by the 
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taxpayer after December 31, 2011, in taxable years ending 
after such date. 
Æ 
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