I
103D CONGRESS
2D SESSION
H. R. 4269
To amend the Internal Revenue Code of 1986 to reduce the tax on capital
gains of individuals, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
APRIL 20, 1994
Mr. SMITH of Texas introduced the following bill; which was referred to the
Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to reduce
the tax on capital gains of individuals, and for other
purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Economic Investment
and Savings Incentive Act’’.
SEC. 2. REDUCTION IN CAPITAL GAINS TAX FOR INDIVID-
UALS.
(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 by adding at
the end thereof the following new section:
‘‘SEC. 1203. DEDUCTION FOR CAPITAL GAINS.
‘‘(a) ALLOWANCE OF DEDUCTION.—If, for any tax-
able year, a taxpayer other than a corporation has a net
capital gain, there shall be allowed as a deduction from
gross income for such taxable year an amount equal to
the sum of—
‘‘(1) 60 percent of the 3-year capital gain,
‘‘(2) 40 percent of the 2-year capital gain, and
‘‘(3) 20 percent of the 1-year capital gain.
‘‘(b) TRANSITIONAL RULES.—
‘‘(1) YEARS BEGINNING IN 1994.—In the case of
a taxable year beginning in 1994, the deduction
under subsection (a) shall be 60 percent of the net
capital gain.
‘‘(2) YEARS BEGINNING IN 1995.—In the case of
a taxable year beginning in 1995, the deduction
under subsection (a) shall be the sum of—
‘‘(A) 60 percent of the 3-year capital gain
and the 2-year capital gain, and
‘‘(B) 40 percent of the 1-year capital gain.
‘‘(c) DEFINITIONS.—For purposes of this section:
‘‘(1) 3-YEAR CAPITAL GAIN.—The term ‘3-year
capital gain’ means the lesser of—
‘‘(A) the net capital gain for the taxable
year, or
‘‘(B) the long-term capital gain determined
by only taking into account gain from the sale
or exchange of assets held for more than 3
years.
‘‘(2) 2-YEAR CAPITAL GAIN.—The term ‘2-year
capital gain’ means the lesser of—
‘‘(A) the net capital gain for the taxable
year reduced by the 3-year capital gain, or
‘‘(B) the long-term capital gain determined
by only taking into account gain from the sale
or exchange of assets held for more than 2
years but not more than 3 years.
‘‘(3) 1-YEAR CAPITAL GAIN.—The term ‘1-year
capital gain’ means the net capital gains for the tax-
able year reduced by the 3-year capital gain and the
2-year capital gain.
‘‘(4) RECAPTURE
OF
NET
ORDINARY
LOSS
UNDER SECTION 1231.—For purposes of this sub-
section, if any amount is treated as ordinary income
under section 1231(c) for any taxable year—
‘‘(A) the amount so treated shall be allo-
cated proportionately among the section 1231
gains (as defined in section 1231(a)) for such
taxable year, and
‘‘(B) the amount so allocated to any such
gain shall reduce the amount of such gain.
‘‘(c) ESTATE AND TRUSTS.—In the case of an estate
or trust, the deduction under this section shall be com-
puted 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
includable by the income beneficiaries as gain derived from
the sale or exchange of capital assets.’’
(b) TREATMENT OF COLLECTIBLES.—
(1) IN GENERAL.—Section 1222 of such Code
is amended by inserting after paragraph (11) the
following new paragraph:
‘‘(12) SPECIAL RULE FOR COLLECTIBLES.—
‘‘(A) IN GENERAL.—Any gain or loss from
the sale or exchange of a collectible shall be
treated as a short-term capital gain or loss (as
the case may be), without regard to the period
such asset was held. The preceding sentence
shall apply only to the extent the gain or loss
is taken into account in computing taxable in-
come.
‘‘(B) TREATMENT OF CERTAIN SALES OF
INTEREST
IN
PARTNERSHIP, ETC.—For pur-
poses of subparagraph (A), any gain from the
sale or exchange of an interest in a partnership,
S corporation, or trust which is attributable to
unrealized appreciation in the value of collect-
ibles held by such entity shall be treated as gain
from the sale or exchange of a collectible. Rules
similar to the rules of section 751(f) shall apply
for purposes of the preceding sentence.
‘‘(C) COLLECTIBLE.—For purposes of this
paragraph, the term ‘collectible’ means any cap-
ital asset which is a collectible (as defined in
section 408(m) without regard to paragraph (3)
thereof).’’
(2) 
CHARITABLE
DEDUCTION
NOT
AF-
FECTED.—
(A) Paragraph (1) of section 170(e) is
amended by adding at the end thereof the fol-
lowing new sentence: ‘‘For purposes of this
paragraph, section 1222 shall be applied with-
out regard to paragraph (12) thereof (relating
to special rule for collectibles).’’
(B) Clause (iv) of section 170(b)(1)(C) is
amended by inserting before the period at the
end thereof the following: ‘‘and section 1222
shall be applied without regard to paragraph
(12) thereof (relating to special rule for collect-
ibles)’’.
(c) MINIMUM TAX.—Section 56(b) of such Code is
amended by adding at the end thereof the following new
paragraph:
‘‘(4) CAPITAL GAINS DEDUCTION ALLOWED.—
The deduction under section 1203 shall be allowed.’’
(d) CONFORMING AMENDMENTS.—
(1) Subsection (h) of section 1 of such Code is
hereby repealed.
(2) Section 62(a) of such Code is amended by
inserting after paragraph (15) the following new
paragraph:
‘‘(16) CAPITAL GAINS DEDUCTION.—The deduc-
tion allowed by section 1203.’’
(3) Subparagraph (B) of section 163(d)(4) is
amended by striking clauses (i), (ii), and (iii) and in-
serting the following:
‘‘(i) gross income from property held
for investment (other than any gain taken
into account under clause (ii)), and
‘‘(ii) any net gain attributable to the
disposition of property held for investment
reduced by any deduction allowable under
section 1203 attributable to gain from
such property.’’
(4)(A) Section 170(e)(1)(B) of such Code is
amended by inserting ‘‘(or, in the case of a taxpayer
other than a corporation, the nondeductible percent-
age of the amount of gain)’’ after ‘‘the amount of
gain’’.
(B) Section 170(e)(1) of such Code is amended
by adding at the end thereof the following new sen-
tence: ‘‘For purposes of subparagraph (B), the term
‘nondeductible percentage’ means 100 percent minus
the applicable percentage with respect to such prop-
erty under section 1203(c).’’
(5) Subparagraph (B) of section 172(d)(2) of
such Code is amended by inserting ‘‘, and the deduc-
tion provided by section 1203,’’ after ‘‘section
1202’’.
(6)(A) Section 220 of such Code (relating to
cross reference) is amended to read as follows:
‘‘SEC. 220. CROSS REFERENCES.
‘‘(1) For deduction for net capital gain, see section
1203.
‘‘(2) For deductions in respect of a decedent, see
section 691.’’
(B) The table of sections for part VII of sub-
chapter B of chapter 1 of such Code is amended by
striking ‘‘reference’’ in the item relating to section
220 and inserting ‘‘references’’.
(7) 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 exclusion
allowable to the estate or trust under section 1202
and for any deduction allowable to the estate or
trust under section 1203. In the case of a trust, the
deduction allowed by this subsection shall be subject
to section 681 (relating to unrelated business in-
come).’’
(8) Paragraph (3) of section 643(a) of such
Code is amended by inserting ‘‘, and the deduction
under section 1203,’’ after ‘‘section 1202’’.
(9) Paragraph (6)(C) of section 643(a) of such
Code is amended—
(A) by inserting ‘‘(i)’’ before ‘‘there’’, and
(B) by inserting ‘‘, and (ii) the deduction
under section 1203 (relating to deduction for
excess of capital gains over capital losses) shall
not be taken into account’’ before the period at
the end thereof.
(10) Paragraph (4) of section 691(c) of such
Code is amended—
(A) by striking ‘‘1(h),’’ , and
(B) by inserting ‘‘1203,’’ after ‘‘1202,’’.
(11) The second sentence of paragraph (2) of
section 871(a) of such Code is amended by striking
‘‘section 1202’’ and inserting ‘‘sections 1202 and
1203’’.
(12)(A) Subparagraph (B) of section 904(b)(2)
of such Code is amended by striking out so much of
such subparagraph as precedes clause (i) and insert-
ing the following:
‘‘(B) SPECIAL RULES WHERE CORPORATE
CAPITAL
RATE
GAIN
DIFFERENTIAL.—In the
case 
of 
a 
corporation, 
for 
any 
taxable
year for which there is a capital gain rate dif-
ferential—’’.
(B) Subparagraphs (D) and (E) of section
904(b)(3) of such Code are amended to read as fol-
lows:
‘‘(D) CAPITAL
GAIN
RATE
DIFFEREN-
TIAL.—There is a capital gain rate differential
for any taxable year if any rate of tax imposed
by section 11, 511, or 831(a) or (b) (whichever
applies) exceeds the alternative rate of tax
under section 1201(a) (determined without re-
gard to the last sentence of section 11(b)(1)).
‘‘(E) RATE DIFFERENTIAL PORTION.—The
rate differential portion of foreign source net
capital gain, net capital, or the excess of net
capital gain from sources within the United
States over net capital gain, as the case may
be, is the same proportion of such amount as—
‘‘(i) the excess of the highest rate of
tax specified in section 11(b)(1) over the
alternative rate of tax under section
1201(a), bears to
‘‘(ii) the highest rate of tax specified
in section 11(b)(1).’’
(13) Section 1402(i)(1) is amended to read as
follows:
‘‘(1) IN
GENERAL.—In determining the net
earnings from self-employment of any options dealer
or commodities dealer—
‘‘(A) notwithstanding subsection (a)(3)(A),
there shall not be excluded any gain or loss (in
the normal course of the taxpayer’s activity of
dealing in or trading section 1256 contracts)
from section 1256 contracts or property related
to such contracts, and
‘‘(B) the deduction provided by section
1203 shall not apply.’’
(e) CLERICAL AMENDMENT.—The table of sections
for part I of subchapter P of chapter 1 is amended by
adding at the end thereof the following new item:
‘‘Sec. 1203. Deduction for capital gains.’’
(f) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1993.
SEC. 3. INDEXING OF CERTAIN ASSETS ACQUIRED ON OR
AFTER JANUARY 1, 1997, FOR PURPOSES OF
DETERMINING GAIN.
(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 ACQUIRED ON
OR AFTER JANUARY 1, 1997, 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 1 year, the indexed
basis of the asset shall be substituted for its ad-
justed basis.
‘‘(2) SPECIAL RULE FOR RECAPTURE GAIN.—
‘‘(A) IN
GENERAL.—Paragraph (1) shall
not apply for purposes of determining the
amount of recapture gain on the sale or other
disposition of an indexed asset, but the amount
of any such recapture gain shall increase the
adjusted basis of the asset for purposes of ap-
plying paragraph (1) to determine the amount
of other gain on such sale or other disposition.
‘‘(B) RECAPTURE GAIN.—For purposes of
subparagraph (A), the term ‘recapture gain’
means any gain treated as ordinary income
under section 1245, 1250, or 1254 and any
gain which would have been treated as ordinary
income under section 1250 if such section ap-
plied to all depreciation adjustments instead of
only additional depreciation.
‘‘(b) INDEXED ASSET.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘indexed asset’ means—
‘‘(A) any stock in a corporation, and
‘‘(B) any 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)) and the
holding period of which begins on or after January
1, 1997.
‘‘(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) COLLECTIBLES.—Any collectible (as
defined in section 408(m)(2) without regard to
section 408(m)(3)).
‘‘(C) OPTIONS.—Any option or other right
to acquire an interest in property.
‘‘(D) NET LEASE PROPERTY.—In the case
of a lessor, net lease property (within the mean-
ing of subsection (i)(3)).
‘‘(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, or
any domestic regional exchange for which quotations
are published on a regular basis or is authorized for
trading on the national market system operated by
the National Association of Securities Dealers other
than—
‘‘(A) a passive foreign corporation (as de-
fined in section 1296), and
‘‘(B) 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) INDEXED BASIS.—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 shall be deter-
mined by dividing—
‘‘(A) the CPI for the calendar year preced-
ing the calendar year in which the disposition
takes place, by
‘‘(B) the CPI for the calendar year preced-
ing the calendar year in which the taxpayer’s
holding period for such asset began.
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-thousandth.
‘‘(3) CONVENTIONS.—For purposes of para-
graph (2), if any asset is disposed of during any cal-
endar year—
‘‘(A) such disposition shall be treated as
occurring on the last day of such calendar year,
and
‘‘(B) the taxpayer’s holding period for such
asset shall be treated as beginning in the same
calendar year as would be determined for an
asset actually disposed of on such last day with
a holding period of the same length as the ac-
tual holding period of the asset involved.
‘‘(4) CPI.—For purposes of this subsection, the
CPI for any calendar year shall be determined under
section 1(f)(4).
‘‘(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)(2) 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 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 deter-
mined without regard to this section
exceeds the entity’s net capital gain
for such year determined with regard
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.
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
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) 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 (determined without regard to the
requirement that the holding period begin on or
after January 1, 1997) 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 (but only for purposes
of determining the income of partners who are
not corporations).
‘‘(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. 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 (but only for purposes of deter-
mining the income of participants who are not cor-
porations).
‘‘(g) DISPOSITIONS BETWEEN RELATED PERSONS.—
This section shall not apply to any sale or other disposition
of property between related persons (within the meaning
of section 465(b)(3)(C)) if such property, in the hands of
the transferee, is of a character subject to the allowance
for depreciation provided in section 167.
‘‘(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.
‘‘(j) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section.’’
(b) GAINS AND LOSSES FROM INDEXED ASSETS NOT
TAKEN INTO ACCOUNT UNDER LIMITATION ON INVEST-
MENT
INTEREST.—Subparagraph 
(B) 
of 
section
163(d)(4) of such Code (defining investment income) is
amended by adding at the end thereof the following new
sentences:
‘‘Gain from the sale or other disposition of an in-
dexed asset (as defined in section 1022) held for
more than 1 year shall not be taken into account for
purposes of the preceding sentence. The preceding
sentence shall not apply to gain from the sale or
other disposition of any such asset if the taxpayer
elects to waive the benefits of section 1022 in deter-
mining the amount of such gain.’’
(c) 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 acquired on or after Janu-
ary 1, 1997, for purposes of determining gain.’’
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to the disposition of any
property the holding period of which begins on or
after January 1, 1997.
(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 on or after January 1, 1997, from a
related person (as defined in section 465(b)(3)(C) of
the Internal Revenue Code of 1986) 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.
(e) ELECTION TO RECOGNIZE GAIN ON READILY
TRADABLE SECURITIES HELD ON JANUARY 1, 1997.—
(1) IN GENERAL.—If a taxpayer other than a
corporation holds any readily tradable security on
January 1, 1997, the taxpayer may elect to treat
such security as having been sold on the last busi-
ness day before such date for an amount equal to its
closing market price on such last business day (and
as having been reacquired on such last business day
for an amount equal to such closing market price).
(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 last business day referred to
in paragraph (1).
(B) Any loss resulting from an election
under paragraph (1) shall not be allowed for
any taxable year.
(3) ELECTION.—An election under paragraph
(1) shall be made in such manner as the Secretary
may prescribe and shall specify the readily tradable
securities for which such election is made. Such an
election, once made with respect to any readily
tradable security, shall be irrevocable.
(4) READILY TRADABLE SECURITY.—For pur-
poses of this subsection, the term ‘‘readily tradable
security’’ means any stock or other security which,
as of January 1, 1997, is readily tradable on an es-
tablished securities market or otherwise.
SEC. 4. MIDDLE INCOME SAVINGS INCENTIVES.
(a) GENERAL RULE.—Part III of subchapter B of
chapter 1 of the Internal Revenue Code of 1986 (relating
to items specifically excluded from gross income) is
amended by inserting after section 115 the following new
section:
‘‘SEC. 116. MIDDLE INCOME EXCLUSION FOR INVESTMENT
INCOME.
‘‘(a) GENERAL RULE.—In the case of an eligible indi-
vidual, gross income does not include qualified investment
income.
‘‘(b) LIMITATION.—
‘‘(1) IN GENERAL.—The amount excluded from
gross income under subsection (a) for any taxable
year shall not exceed $500 ($1,000 in the case of a
joint return).
‘‘(2) PHASEOUT.—If the modified adjusted
gross income of the individuals exceeds $40,000
($20,000 in the case of a separate return by a mar-
ried individual), the amount determined under para-
graph (1) shall be reduced by an amount equal to
10 percent of such excess.
‘‘(c) DEFINITIONS.—For purposes of this section:
‘‘(1) QUALIFIED INDIVIDUAL.—The term ‘quali-
fied individual’ means any individual if—
‘‘(A) such individual’s modified adjusted
gross income for the taxable year does not ex-
ceed $50,000 ($25,000 in the case of a separate
return by a married individual), and
‘‘(B) at least 50 percent of such individ-
uals modified adjusted gross income for the tax-
able year is attributable to earned income (as
defined in section 911(d)(2)).
For purposes of this section, marital status shall be
determined under section 7703.
‘‘(2) QUALIFIED
INVESTMENT
INCOME.—The
term ‘qualified investment income’ means gross in-
come from property held for investment except that
such term shall not include—
‘‘(A) any gain on the sale or other disposi-
tion of property held for investment, and
‘‘(B) any income taken into account under
section 469 in computing income or loss from
a passive activity.
‘‘(3) MODIFIED
ADJUSTED
GROSS
INCOME.—
The term ‘modified adjusted gross income’ means
adjusted gross income determined—
‘‘(A) without regard to this section and
sections 135, 911, 931, and 933, and
‘‘(B) after the application of sections 86,
469, and 219.
‘‘(d) SPECIAL RULE.—This section shall not apply in
the case of an estate or trust.’’
(b) MINIMUM TAX.—Subsection (b) of section 56 of
such Code is amended by adding at the end thereof the
following new paragraph:
‘‘(4) MIDDLE EXCLUSION ALLOWED.—The ex-
clusion provided by section 116 shall be allowed.’’
(c) CONFORMING AMENDMENTS.—
(1) Subparagraph (A) of section 86(b)(2) of
such Code is amended by inserting ‘‘116,’’ before
‘‘135’’.
(2) Subparagraph (A) of section 135(c)(4) of
such Code is amended by inserting ‘‘116,’’ before
‘‘911’’.
(3) Clause (ii) of section 469(i)(3)(E) if such
Code is amended by striking ‘‘section 135’’ and in-
serting ‘‘sections 116 and 135’’.
(4) Clause (ii) of section 219(g)(3)(A) of such
Code is amended by striking ‘‘section 135’’ and in-
serting ‘‘sections 116, 135,’’.
(d) CLERICAL AMENDMENT.—The table of sections
for part III of subchapter B of chapter 1 of such Code
is amended by inserting after the item relating to section
115 the following new item:
‘‘Sec. 116. Middle income exclusion for investment income.’’
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1993.
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