I
105TH CONGRESS
2D SESSION
H. R. 3170
To amend the Internal Revenue Code of 1986 to prevent the conversion
of ordinary income or short-term capital gain into income eligible for
the long-term capital gain rates, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
FEBRUARY 5, 1998
Mrs. KENNELLY of Connecticut 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 prevent
the conversion of ordinary income or short-term capital
gain into income eligible for the long-term capital gain
rates, 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. CAPITAL GAIN TREATMENT OF GAIN FROM
CONSTRUCTIVE OWNERSHIP TRANSACTIONS.
(a) IN GENERAL.—Part IV of subchapter P of chap-
ter 1 of the Internal Revenue Code of 1986 (relating to
special rules for determining capital gains and losses) is
amended by inserting after section 1259 the following new
section:
‘‘SEC. 1260. GAINS FROM CONSTRUCTIVE OWNERSHIP
TRANSACTIONS.
‘‘(a) IN GENERAL.—If the taxpayer has gain from
a constructive ownership transaction with respect to any
financial position and such gain would (without regard to
this section) be treated as a long-term capital gain—
‘‘(1) such gain shall be treated as short-term
capital gain to the extent that such gain exceeds the
net underlying long-term capital gain, and
‘‘(2) to the extent such gain is treated as a
long-term capital gain after the application of para-
graph (1), the determination of the capital gain rate
(or rates) applicable to such gain under section 1(h)
shall be determined on the basis of the respective
rate (or rates) that would have been applicable to
the net underlying long-term capital gain.
‘‘(b) INTEREST CHARGE ON DEFERRAL OF GAIN
RECOGNITION.—
‘‘(1) IN GENERAL.—If any gain is treated as
short-term capital gain for any taxable year by rea-
son of subsection (a)(1), the taxpayer’s tax imposed
by this chapter for such taxable year shall be in-
creased by the amount of interest which would have
been imposed under section 6601—
‘‘(A) for periods ending on the due date
(without extensions) for the return of tax im-
posed by this chapter for such taxable year, and
‘‘(B) on underpayments of tax for prior
taxable years which would have resulted had
such gain been included in gross income ratably
during the period the constructive ownership
transaction was open.
Any amount payable under this paragraph shall be
taken into account in computing the amount of any
deduction allowable to the taxpayer for interest paid
or accrued during such taxable year.
‘‘(2) NO CREDITS AGAINST INCREASE IN TAX.—
Any increase in tax under paragraph (1) shall not
be treated as tax imposed by this chapter for pur-
poses of determining—
‘‘(A) the amount of any credit allowable
under subpart A, B, D, or G of part IV of sub-
chapter A of chapter 1, or
‘‘(B) the amount of the tax imposed by
section 55.
‘‘(c) FINANCIAL POSITION.—For purposes of this
section—
action described in any of the preceding sub-
paragraphs.
‘‘(2) EXCEPTION FOR POSITIONS WHICH ARE
MARKED TO MARKET.—This section shall not apply
to any constructive ownership transaction if all of
the positions which are part of such transaction are
marked to market under any provision of this title
or the regulations thereunder.
‘‘(3) LONG POSITION.—A person shall be treat-
ed as holding a long position under a notional prin-
cipal contract with respect to any property if such
person—
‘‘(A) has the right to be paid (or receive
credit for) all or substantially all of the invest-
ment yield (including appreciation) on such
property for a specified period, and
‘‘(B) is obligated to reimburse (or provide
credit) for all or substantially all of any decline
in the value of such property.
‘‘(4) FORWARD CONTRACT.—The term ‘forward
contract’ has the meaning given to such term by sec-
tion 1259(d)(1).
‘‘(5) RELATED
PERSON.—The term ‘related
person’ has the meaning given to such term by sec-
tion 1259(c)(4).
‘‘(e) 
NET
UNDERLYING
LONG-TERM
CAPITAL
GAIN.—For purposes of this section, in the case of any
constructive ownership transaction with respect to any fi-
nancial position, the term ‘net underlying long-term cap-
ital gain’ means the aggregate net capital gain that the
taxpayer would have had if—
‘‘(1) such position had been acquired on the
date such transaction was opened and sold on the
date such transaction was closed, and
‘‘(2) only gains and losses that would have re-
sulted from the deemed ownership under paragraph
(1) were taken into account.
The amount of the net underlying long-term capital gain
with respect to any financial position shall be treated as
zero unless the amount thereof is established by clear and
convincing evidence.
‘‘(f) EXCEPTION IF MARK TO MARKET ELECTED.—
‘‘(1) IN GENERAL.—In the case of a taxpayer
who elects to have this subsection apply—
‘‘(A) subsections (a) and (b) shall not
apply,
‘‘(B) such taxpayer shall recognize gain or
loss on any constructive ownership transaction
which is open as of the close of any taxable year
as if the financial position to which such trans-
action relates were sold for its fair market value
on the last business day of such taxable year,
and
‘‘(C) any gain or loss shall be taken into
account for such taxable year.
Proper adjustment shall be made in the amount of
any gain or loss subsequently realized for gain or
loss taken into account under the preceding sen-
tence.
‘‘(2) CHARACTER OF GAIN OR LOSS.—
‘‘(A) IN GENERAL.—Any gain or loss with
respect to a constructive ownership transaction
under paragraph (1) shall be treated as ordi-
nary income or loss.
‘‘(B) SPECIAL RULE FOR DISPOSITIONS.—
If—
‘‘(i) gain or loss is recognized with re-
spect to a constructive ownership trans-
action before the close of the taxable year,
and
‘‘(ii) paragraph (1) would have ap-
plied if the transaction were open as of the
close of the taxable year,
such gain or loss shall be treated as ordinary
income or loss.
‘‘(3) ELECTION.—An election under paragraph
(1) may be made without the consent of the Sec-
retary. Such an election, once made, shall apply to
the taxable year for which made and all subsequent
taxable years unless revoked with the consent of the
Secretary.
‘‘(g) 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 IV of subchapter P of chapter 1 of such Code
is amended by adding at the end the following new item:
‘‘Sec. 1260. Gains from constructive ownership transactions.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to gain recognized after the date
of the enactment of this Act.
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