I
104TH CONGRESS
1ST SESSION
H. R. 512
To amend the Internal Revenue Code of 1986 to reduce the capital gains
tax on stock of domestic corporations engaged in manufacturing and
to index the basis of such stock for inflation.
IN THE HOUSE OF REPRESENTATIVES
JANUARY 13, 1995
Mr. MEEHAN (for himself, Mr. FRANKS of New Jersey, and Mr. QUINN) intro-
duced 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 capital gains tax on stock of domestic corporations
engaged in manufacturing and to index the basis of
such stock for inflation.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. REDUCTION IN INDIVIDUAL CAPITAL GAINS
RATE ON STOCK OF DOMESTIC MANUFAC-
TURERS.
(a) GENERAL RULE.—Subsection (h) of section 1 of
the Internal Revenue Code of 1986 (relating 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, then the tax im-
posed by this section shall not exceed the sum of—
‘‘(A) a tax computed at the rates and in
the same manner as if this subsection had not
been enacted on the taxable income reduced by
the net capital gain,
‘‘(B) 19 percent of the lesser of—
‘‘(i) the 6-year qualified gain for the
taxable year, or
‘‘(ii) the portion of the taxpayer’s tax-
able income for the taxable year which
would be taxed at a rate in excess of 15
percent (determined without regard to this
subsection),
‘‘(C) the 23.5 percent of the lesser of—
‘‘(i) the 3-year qualified gain for the
taxable year, or
‘‘(ii) the excess of the amount de-
scribed in subparagraph (B)(ii) for the tax-
able year over the 6-year qualified gain for
such taxable year, and
‘‘(D) 28 percent of the excess (if any) of
the net capital gain for the taxable year over
the sum of the amounts taken into account
under subparagraphs (B) and (C).
‘‘(2) 3-YEAR QUALIFIED GAIN.—For purposes
of this subsection, the term ‘3-year qualified gain’
means the lesser of—
‘‘(A) the net capital gain for the taxable
year, or
‘‘(B) the net capital gain for the taxable
year determined by taking into account only
gain or loss from the sale or exchange of quali-
fied manufacturer’s stock with a post-1994
holding period of at least 3 years but less than
6 years.
‘‘(3) 6-YEAR QUALIFIED GAIN.—For purposes
of this subsection, the term ‘6-year qualified gain’
means the lesser of—
‘‘(A) the excess of the net capital gain for
the taxable year over 3-year qualified gain, or
‘‘(B) the net capital gain for the taxable
year determined by taking into account only
gain or loss from the sale or exchange of quali-
fied manufacturer’s stock with a post-1994
holding period of at least 6 years.
‘‘(4) QUALIFIED
MANUFACTURER’S
STOCK.—
For purposes of this subsection, the term ‘qualified
manufacturer’s stock’ means stock of any domestic
C corporation if any trade or business of such cor-
poration is described in any 2-digit Standard Indus-
trial Classification Code relating to manufacturing.
‘‘(5) POST-1994
HOLDING
PERIOD.—For pur-
poses of this subsection, the term ‘post-1994 holding
period’ means the portion of the holding period after
December 31, 1994.
‘‘(6) TREATMENT OF PASS-THRU ENTITIES.—
‘‘(A) IN GENERAL.—In applying this sub-
section with respect to any pass-thru entity, the
determination of the period for which any gain
or loss is properly taken into account shall be
made at the entity level.
‘‘(B) PASS-THRU
ENTITY.—For purposes
of subparagraph (A), the term ‘pass-thru entity’
means—
‘‘(i) a regulated investment company,
‘‘(ii) a real estate investment trust,
‘‘(iii) an S corporation,
‘‘(iv) a partnership,
‘‘(v) an estate or trust, and
‘‘(vi) a common trust fund.’’
(b) TECHNICAL AMENDMENTS.—
(1)(A) Section 170(e)(1)(B) of such Code is
amended by inserting ‘‘the applicable percentage of’’
before ‘‘the amount of gain’’.
(B) Section 170(e)(1) of such Code is amended
by adding at the end the following new sentence:
‘‘For purposes of subparagraph (B), the term ‘appli-
cable percentage’ means the percentage determined
by dividing the rate of tax imposed by section 1(h)
by 28, or, in the case of a corporation, the rate of
tax imposed by section 1201(a) by 35.’’
(2)(A) 
The 
second 
sentence 
of 
section
7518(g)(6)(A) of such Code is amended by striking
‘‘28 percent (34 percent in the case of a corpora-
tion)’’ and inserting ‘‘the rate of tax determined
under such section’’.
(B) 
The 
second 
sentence 
of 
section
607(h)(6)(A) of the Merchant Marine Act, 1936, is
amended by striking ‘‘28 percent (34 percent in the
case of a corporation)’’ and inserting ‘‘the rate of
tax determined under such section’’.
SEC. 2. REDUCTION IN CORPORATE CAPITAL GAINS RATE
ON STOCK OF DOMESTIC MANUFACTURERS.
(a) GENERAL RULE.—Section 1201 of the Internal
Revenue Code of 1986 (relating to alternative tax for cor-
porations) is amended by redesignating subsection (b) as
subsection (c) and by striking subsection (a) and inserting
the following:
‘‘(a) GENERAL RULE.—If for any taxable year a cor-
poration has a net capital gain, then, in lieu of the tax
imposed by section 11, 511, or 831(a) (whichever applies),
there is hereby imposed a tax (if such tax is less than
the tax imposed by such section) which shall consist of
the sum of—
‘‘(1) a tax computed on the taxable income re-
duced by the net capital gain, at the same rates and
in the same manner as if this subsection had not
been enacted,
‘‘(2) 19 percent of the lesser of—
‘‘(A) the 6-year qualified gain for the tax-
able year, or
‘‘(B) the portion of the taxpayer’s taxable
income for the taxable year which would be
taxed at a rate in excess of 15 percent (deter-
mined without regard to this subsection),
‘‘(3) 23.5 percent of the lesser of—
‘‘(A) the 3-year qualified gain for the tax-
able year, or
‘‘(B) the excess of the amount described in
paragraph (2)(B) for the taxable year over the
6-year qualified gain for such taxable year, and
‘‘(4) 35 percent of the excess (if any) of the net
capital gain for the taxable year over the sum of the
amounts taken into account under paragraph (2)
and (3).
‘‘(b) DEFINITIONS AND SPECIAL RULE.—For pur-
poses of subsection (a)—
‘‘(1) 3-YEAR
QUALIFIED
GAIN
AND
6-YEAR
QUALIFIED GAIN.—The terms ‘3-year qualified gain’
and ‘6-year qualified gain’ have the respective mean-
ings given to such terms by section 1(h).
‘‘(2) TREATMENT OF PASS-THRU ENTITIES.—
Section 1(h)(6) shall apply for purposes of this sec-
tion.’’
(b) TECHNICAL AMENDMENT.—Clause (iii) of section
852(b)(3)(D) of such Code is amended by striking ‘‘65
percent’’ and inserting ‘‘the applicable percentage ’’ and
by adding at the end the following new sentence: ‘‘For
purposes of the preceding sentence, the term ‘applicable
percentage’ means 100 percent minus the percentage ap-
plicable under section 1201(a)).’’.
SEC. 3. INDEXING OF QUALIFIED MANUFACTURER’S STOCK
FOR PURPOSES OF DETERMINING GAIN OR
LOSS.
(a) IN GENERAL.—Part II of subchapter O of chap-
ter 1 of the Internal Revenue Code of 1986 (relating to
basis rules of general application) is amended by inserting
after section 1021 the following new section:
‘‘SEC. 1022. INDEXING OF QUALIFIED MANUFACTURER’S
STOCK FOR PURPOSES OF DETERMINING
GAIN OR LOSS.
‘‘(a) GENERAL RULE.—Except as otherwise provided
in this subsection, if any qualified manufacturer’s stock
which has been held for more than 3 years (taking into
account only the portion of the holding period after De-
cember 31, 1994) is sold or otherwise disposed of, for pur-
poses of this title the indexed basis of the stock shall be
substituted for its adjusted basis.
‘‘(b) QUALIFIED
MANUFACTURER’S
STOCK.—For
purposes of this section, the term ‘qualified manufactur-
er’s stock’ means stock of any domestic C corporation if—
‘‘(1) any trade or business of such corporation
is described in any 2-digit Standard Industrial Clas-
sification Code relating to manufacturing, and
‘‘(2) such stock is a capital asset in the hands
of the taxpayer.
‘‘(c) INDEXED BASIS.—For purposes of this sec-
tion—
‘‘(1) GENERAL RULE.—The indexed basis for
any stock is—
‘‘(A) the adjusted basis of the stock, multi-
plied by
‘‘(B) the applicable inflation ratio.
‘‘(2) APPLICABLE INFLATION RATIO.—The ap-
plicable inflation ratio for any stock is the percent-
age arrived at by dividing—
‘‘(A) the gross domestic product deflator
for the calendar quarter in which the disposi-
tion takes place, by
‘‘(B) the gross domestic product deflator
for the calendar quarter in which the stock was
acquired by the taxpayer (or, if later, the cal-
endar quarter ending on December 31, 1994).
The applicable inflation ratio shall never be less than
1. The applicable inflation ratio for any stock shall
be rounded to the nearest 1⁄1000.
‘‘(3) GROSS DOMESTIC PRODUCT DEFLATOR.—
The gross domestic product deflator for any cal-
endar quarter is the implicit price deflator for the
gross domestic product for such quarter (as shown
in the first revision thereof).
‘‘(d) TREATMENT
OF
REGULATED
INVESTMENT
COMPANIES AND REAL ESTATE INVESTMENT TRUSTS.—
‘‘(1) ADJUSTMENTS AT ENTITY LEVEL.—
‘‘(A) IN GENERAL.—Except as otherwise
provided in this paragraph, the adjustment
under subsection (a) shall be allowed to any
qualified investment entity (including for pur-
poses of determining the earnings and profits of
such entity).
‘‘(B) 
EXCEPTION
FOR
QUALIFICATION
PURPOSES.—This section shall not apply for
purposes of sections 851(b) and 856(c).
‘‘(2) ADJUSTMENTS
TO
INTERESTS
HELD
IN
ENTITY.—
‘‘(A) IN GENERAL.—Stock in a qualified
investment entity shall be qualified manufactur-
er’s stock for any calendar month in the same
ratio as the fair market value of the qualified
manufacturer’s stock held by such entity at the
close of such month 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).
‘‘(e) OTHER PASS-THRU ENTITIES.—
‘‘(1) PARTNERSHIPS.—In the case of a partner-
ship, the adjustment made under subsection (a) at
the partnership level shall be passed through to the
partners.
‘‘(2) S CORPORATIONS.—In the case of an S
corporation, the adjustment made under subsection
(a) at the corporate level shall be passed through to
the shareholders.
‘‘(3) COMMON TRUST FUNDS.—In the case of a
common trust fund, the adjustment made under sub-
section (a) at the trust level shall be passed through
to the participants.
‘‘(f) DISPOSITIONS BETWEEN RELATED PERSONS.—
‘‘(1) IN GENERAL.—This section shall not apply
to any sale or other disposition of property between
related persons except to the extent that the basis
of such property in the hands of the transferee is a
substituted basis.
‘‘(2) RELATED PERSONS DEFINED.—For pur-
poses of this section, the term ‘related persons’
means—
‘‘(A) persons bearing a relationship set
forth in section 267(b), and
‘‘(B) persons treated as single employer
under subsection (b) or (c) of section 414.
‘‘(g) 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.
‘‘(h) SPECIAL RULES.—For purposes of this section:
‘‘(1) TREATMENT
AS
SEPARATE
STOCK.—A
substantial contribution to capital of a corporation
shall be treated as separate stock in such corpora-
tion.
‘‘(2) STOCK WHICH IS NOT QUALIFIED MANU-
FACTURER’S
STOCK
THROUGHOUT
HOLDING
PE-
RIOD.—The applicable inflation ratio shall be appro-
priately reduced for periods during which stock is
not qualified manufacturer’s stock.
‘‘(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) to stock
while such stock was held by the taxpayer, the date
of acquisition of such stock by the taxpayer shall be