I
105TH CONGRESS
2D SESSION
H. R. 3860
To amend the Internal Revenue Code of 1986 to eliminate taxes on capital
gains after December 31, 2001.
IN THE HOUSE OF REPRESENTATIVES
MAY 13, 1998
Mr. SCARBOROUGH 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 eliminate
taxes on capital gains after December 31, 2001.
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 ‘‘Capital Gains Sunset
Act’’.
SEC. 2. 100 PERCENT CAPITAL GAINS DEDUCTION.
(a) GENERAL RULE.—Section 1201 of the Internal
Revenue Code of 1986 is amended to read as follows:
‘‘SEC. 1201. CAPITAL GAINS DEDUCTION.
‘‘(a) GENERAL RULE.—If for any taxable year a tax-
payer has a net capital gain, 100 percent of such gain
shall be a deduction from gross income.
‘‘(b) ESTATES AND TRUSTS.—In the case of an es-
tate or trust, the deduction shall be computed 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 includible by the in-
come beneficiaries as gain derived from the sale or ex-
change of capital assets.
‘‘(c) COORDINATION WITH TREATMENT OF CAPITAL
GAIN UNDER LIMITATION ON INVESTMENT INTEREST.—
For purposes of this section, the net capital gain for any
taxable year shall be reduced (but not below zero) by the
amount which the taxpayer takes into account as invest-
ment income under section 163(d)(4)(B)(iii).
‘‘(d) TRANSITIONAL RULES.—
‘‘(1) IN GENERAL.—In the case of a taxable
year which includes January 1, 2002—
‘‘(A) the amount taken into account as the
net capital gain under subsection (a) shall not
exceed the net capital gain determined by only
taking into account gains and losses properly
taken into account for the portion of the tax-
able year on or after January 1, 2002, and
‘‘(B) the amount of the net capital gain
taken into account in applying section 1(h) for
such year shall be reduced by the amount taken
into account under subparagraph (A) for such
year.
‘‘(2) SPECIAL
RULES
FOR
PASS-THRU
ENTI-
TIES.—
‘‘(A) IN GENERAL.—In applying paragraph
(1) with respect to any pass-thru entity, the de-
termination of when gains and losses are prop-
erly taken into account shall be made at the en-
tity 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) DEDUCTION ALLOWABLE
IN COMPUTING AD-
JUSTED GROSS INCOME.—Subsection (a) of section 62 of
such Code is amended by inserting after paragraph (17)
the following new paragraph:
‘‘(18) LONG-TERM
CAPITAL
GAINS.—The de-
duction allowed by section 1201.’’
(c) TECHNICAL AND CONFORMING CHANGES.—
(1) Section 1 of such Code is amended by strik-
ing subsection (h).
(2) Section 12 of such Code is amended by
striking paragraph (4) and redesignating the follow-
ing paragraphs accordingly.
(3)(A) Subsection (a) of section 57 of such
Code is amended by striking paragraph (7).
(B) Subclause (II) of section 53(d)(1)(B)(ii) of
such Code is amended by striking ‘‘, (5), and (7)’’
and inserting ‘‘and (5)’’.
(4) The first sentence of paragraph (1) of sec-
tion 170(e) of such Code is amended by striking ‘‘re-
duced by the sum of—’’ and all that follows and in-
serting ‘‘reduced by the amount of gain which would
not have been long-term capital gain if the property
contributed had been sold by the taxpayer at its fair
market value (determined at the time of such con-
tribution).’’
(5) Paragraph (2) of section 172(d) of such
Code is amended to read as follows:
‘‘(2) CAPITAL GAINS AND LOSSES.—
‘‘(A) LOSSES OF TAXPAYERS OTHER THAN
CORPORATIONS.—In the case of a taxpayer
other than a corporation, the amount deductible
on account of losses from sales or exchanges of
capital assets shall not exceed the amount in-
cludible on account of gains from sales or ex-
changes of capital assets.
‘‘(B) DEDUCTION FOR CAPITAL GAINS.—
The deduction under section 1201 shall not be
allowed.’’
(6) The last sentence of section 453A(c)(3) of
such Code is amended by striking all that follows
‘‘long-term capital gain,’’ and inserting ‘‘the deduc-
tion under section 1201 shall be taken into ac-
count.’’
(7) Paragraph (2) of section 468B(b) of such
Code is amended by inserting ‘‘the deduction allowed
by section 1201 and by’’ after ‘‘reduced by’’.
(8) Paragraph (2) of section 527(b) such Code
is hereby repealed.
(9) Subparagraph (A) of section 641(d)(2) of
such Code is amended by striking ‘‘Except as pro-
vided in section 1(h), the’’ and inserting ‘‘The’’.
(10) 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 deduction
allowable to the estate or trust under section 1201
(relating to capital gains deduction). In the case of
a trust, the deduction allowed by this subsection
shall be subject to section 681 (relating to unrelated
business income).’’
(11) The last sentence of section 643(a)(3) of
such Code is amended to read as follows: ‘‘The de-
duction under section 1201 (relating to capital gains
deduction) shall not be taken into account.’’
(12) Subparagraph (C) of section 643(a)(6) of
such Code is amended by inserting ‘‘(i)’’ before
‘‘there shall’’ and by inserting before the period ‘‘,
and (ii) the deduction under section 1201 (relating
to capital gains deduction) shall not be taken into
account’’.
(13) Paragraph (4) of section 691(c) of such
Code is amended by striking ‘‘1(h), 1201, 1202’’
and inserting ‘‘1201’’.
(14) Paragraph (2) of section 801(a) of such
Code is hereby repealed.
(15) Subsection (c) of section 831 of such Code
is amended by striking paragraph (1) and redesig-
nating the following paragraphs accordingly.
(16)(A) Paragraph (3) of section 852(b) of
such Code is amended by striking subparagraph (A).
(B) Subparagraph (D) of section 852(b)(3) of
such Code is amended—
(i) in clause (i) by striking ‘‘shall not ex-
ceed’’ and all that follows and inserting ‘‘shall
not exceed that part of the excess (if any) of
the net capital gain over the deduction for divi-
dends paid (as defined in section 561 and de-
termined with reference to capital gain divi-
dends only) which he would have received if all
of such amount had been distributed as capital
gain dividends by the company to the holders of
such shares at the close of its taxable year.’’,
and
(ii) by striking clauses (ii), (iii), and (iv)
and redesignating clause (v) as clause (ii).
(17)(A) Paragraph (2) of section 857(b) of
such Code is amended by adding at the end the fol-
lowing new subparagraph: