I
105TH CONGRESS
1ST SESSION
H. R. 241
To amend the Internal Revenue Code of 1986 to allow a deduction for
capital gains for middle income taxpayers.
IN THE HOUSE OF REPRESENTATIVES
JANUARY 7, 1997
Mr. NEAL of Massachusetts 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 allow a
deduction for capital gains for middle income taxpayers.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Middle Income Tax Relief Act of 1997’’.
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
ment or repeal is expressed in terms of an amendment
to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986.
SEC. 2. REDUCTION IN CAPITAL GAINS TAX FOR INDIVID-
UALS.
(a) GENERAL RULE.—Part I of subchapter P of
chapter 1 (relating to treatment of capital gains) is
amended by adding at the end thereof the following new
section:
‘‘SEC. 1203. CAPITAL GAINS DEDUCTION FOR INDIVIDUALS.
‘‘(a) IN GENERAL.—In the case of an individual,
there shall be allowed as a deduction for the taxable year
the capital gains deduction (if any) determined under sub-
section (b).
‘‘(b) LIFETIME CAPITAL GAINS BANK.—
‘‘(1) IN GENERAL.—For purposes of subsection
(a), the capital gains deduction determined under
this subsection for any taxable year is 50 percent of
the qualified gain for such taxable year.
‘‘(2) LIMITATIONS.—
‘‘(A) LIFETIME
LIMIT.—The amount of
the qualified gain taken into account under
paragraph (1) for any taxable year shall not ex-
ceed $400,000 reduced by the aggregate
amount of the qualified gain taken into account
under this subsection by the taxpayer for prior
taxable years.
‘‘(B) DEDUCTION NOT AVAILABLE TO TAX-
PAYERS WITH ADJUSTED GROSS INCOME IN EX-
CESS OF $250,000.—In the case of a taxpayer
with adjusted gross income of $200,000 or
greater, the deduction determined under this
subsection shall be reduced (but not below zero)
by an amount which bears the same ratio to the
amount of such deduction as—
‘‘(i) the adjusted gross income of the
taxpayer for the taxable year in excess of
$200,000, bears to
‘‘(ii) $50,000.
‘‘(3) QUALIFIED GAIN.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (1), the term ‘qualified gain’ means the
lesser of—
‘‘(i) the net capital gain on the sale or
exchange of a qualified asset for the tax-
able year, or
‘‘(ii) the net capital gain for the tax-
able year determined by only taking into
account gains and losses from sales and
exchanges on or after January 1, 1997, of
qualified assets.
‘‘(B) SPECIAL RULES.—
‘‘(i) For purposes of subparagraph
(A)(ii), any amount treated as a capital
loss for the taxable year under section
1212 shall be treated as a loss from a sale
or exchange on or after January 1, 1997,
of a qualified asset.
‘‘(ii) A taxpayer may elect for any
taxable year not to take into account under
this subsection all (or any portion) of the
qualified gain for such taxable year. Such
an election, once made, shall be irrev-
ocable.
‘‘(4) QUALIFIED ASSETS.—For purposes of this
subsection, the term ‘qualified asset’ means any cap-
ital asset (within the meaning of section 1221), ex-
cept that such term shall not include any collectible
(as defined in section 408(m) without regard to
paragraph (3) thereof).
‘‘(5) SUBSECTION NOT TO APPLY IN CERTAIN
CASES.—This subsection shall not apply in the case
of—
‘‘(A) sales or exchanges to related persons
(within the meaning of section 267(b) or
707(b)(1));
‘‘(B)(i) an individual who has not attained
the age of 25 before the close of the taxable
year;
‘‘(ii) a married individual (within the
meaning of section 7703) filing a separate
return for the taxable year; or
‘‘(iii) an estate or trust.
‘‘(c) SPECIAL RULES.—
‘‘(1) GAIN ON SALE OR EXCHANGE OF REAL
PROPERTY
DETERMINED
BY
REFERENCE
TO
IN-
DEXED BASIS.—
‘‘(A) IN GENERAL.—For purposes of deter-
mining, under this section, the amount of the
qualified gain from the sale or exchange of real
property, the indexed basis of the property shall
be substituted for its adjusted basis.
‘‘(B) INDEXED
BASIS.—For purposes of
this section—
‘‘(i) INDEXED
BASIS.—The indexed
basis for any real property described in
subparagraph (A) is—
‘‘(I) the adjusted basis of the
property, multiplied by
‘‘(II) 
the 
applicable 
inflation
ratio.
‘‘(ii) 
APPLICABLE
INFLATION
RATIO.—The applicable inflation ratio for
any real property described in subpara-
graph (A) is the percentage derived by di-
viding—
‘‘(I) the CPI for the calendar
month in which the disposition takes
place, by
‘‘(II) the CPI for the calendar
month in which the property was ac-
quired by the taxpayer.
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 1⁄10
of 1 percent.
‘‘(iii) CPI FOR CALENDAR MONTH.—
The CPI for any calendar month is the
Consumer Price Index (as defined in sec-
tion 1(f)(5)) for such month.
‘‘(C) REAL PROPERTY.—For purposes of
this paragraph, the term ‘real property’ means
land and any section 1250 property (within the
meaning of section 1250(c)).
‘‘(2) TREATMENT OF CERTAIN SALES OF IN-
TERESTS IN PARTNERSHIPS, ETC.—For purposes of
subsection (b), any gain from the sale or exchange
of a qualified asset which is an interest in a partner-
ship, S corporation, or trust shall not be treated as
gain from the sale or exchange of a qualified asset
to the extent such sale gain is attributable to unreal-
ized appreciation in the value of property described
in subsection (b)(4) which is held by such entity.
Rules similar to the rules of section 751(f) shall
apply for purposes of the preceding sentence.
‘‘(3) DEDUCTION ONLY AVAILABLE FOR CER-
TAIN SALES OR EXCHANGES.—
‘‘(A) SALE
OR
EXCHANGE
MUST
OCCUR
AFTER
DECEMBER
31, 1996.—The amount of
the net capital gain taken into account under
subsection (b)(3)(A) shall not exceed the
amount of the net capital gain determined by
only taking into account gains and losses from
sales and exchanges on or after January 1,
1997. For purposes of the preceding sentence,
any amount treated as a capital loss for the
taxable year under section 1212 shall be treated
as a loss from a sale or exchange on or after
such date.
‘‘(B) REQUIRED
HOLDING
PERIOD
MUST
BE SATISFIED.—No gain shall be taken into ac-
count under subsection (b)(3)(A) unless the
holding period of the property sold or ex-
changed (determined under the principles of
section 1223) exceeds 3 years.
‘‘(4) DETERMINATION OF ADJUSTED GROSS IN-
COME.—
‘‘(A) IN GENERAL.—For purposes of sub-
section (b), adjusted gross income shall be de-
termined—
‘‘(i) without regard to the deduction
allowed under this section, but
‘‘(ii) after the application of sections
86, 135, 219, and 469.
‘‘(B) COORDINATION
WITH
OTHER
AD-
JUSTED
GROSS
INCOME
LIMITATIONS.—For
purposes of the sections listed in subparagraph
(A)(ii), adjusted gross income shall be deter-
mined without regard to the deduction allowed
under this section.
‘‘(5) SPECIAL
RULE
FOR
PASS-THRU
ENTI-
TIES.—
‘‘(A) IN GENERAL.—In applying this sec-
tion with respect to any pass-thru entity, the
determination of when the sale or exchange oc-
curs shall be made at the entity level.
‘‘(B) PASS-THRU ENTITY DEFINED.—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) COORDINATION WITH MINIMUM TAX.—Para-
graph (1) of section 56(b) is amended by adding at the
end the following new subparagraph:
‘‘(G) CAPITAL GAINS DEDUCTION NOT AL-
LOWED.—The deduction under section 1203
shall not be allowed.’’.
(c) COORDINATION WITH MAXIMUM CAPITAL GAINS
RATE.—Subsection (h) of section 1 (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 greater of—
‘‘(i) taxable income reduced by the
amount of the net capital gain, or
‘‘(ii) the amount of taxable income
taxed at a rate below 28 percent, plus
‘‘(B) a tax of 28 percent of the amount of
taxable income in excess of the amount deter-
mined under subparagraph (A).
For purposes of the preceding sentence, the net cap-
ital gain for any taxable year shall be reduced (but
not below zero) by the amount which the taxpayer
elects to take into account as investment income for
the taxable year under section 163(d)(4)(B)(iii).
‘‘(2) COORDINATION WITH SECTION 1203 DE-
DUCTION.—For purposes of paragraph (1), the
amount of the net capital gain shall be reduced by
the amount allowable as a deduction under section
1203(a).’’.
(d) CONFORMING AMENDMENTS.—
(1) Subsection (a) of section 62 is amended by
inserting after paragraph (16) the following new
paragraph:
‘‘(17) CAPITAL GAINS DEDUCTION.—The deduc-
tion allowed by section 1203.’’
(2) Subclause (I) of section 163(d)(4)(B)(i) is
amended by inserting ‘‘, reduced by the amount of
any deduction allowable under section 1203 attrib-
utable to gain for such property’’ after ‘‘invest-
ment’’.
(3)(A) Paragraph (2) of section 172(d) is
amended to read as follows:
‘‘(2) CAPITAL
GAINS
AND
LOSSES
OF
TAX-
PAYERS OTHER THAN CORPORATIONS.—In the case
of a taxpayer other than a corporation—
‘‘(A) the amount deductible on account of
losses from sales or exchanges of capital assets
shall not exceed the amount includible on ac-
count of gains from sales or exchanges of cap-
ital assets;
‘‘(B) the exclusion provided by section
1202 shall not be allowed; and
‘‘(C) the deduction provided by section
1203 shall not be allowed.’’.
(B) Subparagraph (B) of section 172(d)(4)
is 
amended 
by 
inserting 
‘‘(2)(C),’’ 
after
‘‘(2)(B),’’.
(4)(A) Section 221 (relating to cross reference)
is amended to read as follows:
‘‘SEC. 221. CROSS REFERENCES.
‘‘(1) For deduction for net capital gains in the case
of a taxpayer other than a corporation, 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 is amended by striking ‘‘ref-
erence’’ in the item relating to section 221 and in-
serting ‘‘references’’.
(5) Paragraph (4) of section 691(c) is amended
by inserting ‘‘1203,’’ after ‘‘1202,’’.
(6) The second sentence of paragraph (2) of
section 871(a) is amended by striking ‘‘section
1202’’ and inserting ‘‘sections 1202 and 1203’’.
(7) Paragraph (1) of section 1402(i) is amend-
ed 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. Capital gains deduction for individuals.’’
(f) EFFECTIVE DATES.—The amendments made by
this section shall apply to taxable years ending after
December 31, 1996.
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