I
107TH CONGRESS
1ST SESSION
H. R. 3071
To amend the Internal Revenue Code of 1986 to index the basis of assets
acquired after December 31, 2001, for purposes of determining gain.
IN THE HOUSE OF REPRESENTATIVES
OCTOBER 9, 2001
Mr. SMITH of Michigan 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 index
the basis of assets acquired after December 31, 2001,
for purposes of determining gain.
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 Tax
Fairness Act of 2001’’.
SEC. 2. INDEXING OF CERTAIN ASSETS ACQUIRED AFTER
DECEMBER 31, 2000, FOR PURPOSES OF DE-
TERMINING 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 1022 the following new section:
‘‘SEC. 1023. INDEXING OF CERTAIN ASSETS ACQUIRED
AFTER DECEMBER 31, 2001, 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 3 years, the indexed
basis of the asset shall be substituted for its ad-
justed basis.
‘‘(2) EXCEPTION
FOR
DEPRECIATION, ETC.—
The deductions for depreciation, depletion, and am-
ortization shall be determined without regard to the
application of paragraph (1) to the taxpayer or any
other person.
‘‘(3) 
EXCEPTION
FOR
PRINCIPAL
RESI-
DENCES.—Paragraph (1) shall not apply to any dis-
position of the principal residence (within the mean-
ing of section 121) of the taxpayer .
‘‘(b) INDEXED ASSET.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘indexed asset’ means—
‘‘(A) common stock in a C corporation
(other than a foreign corporation), and
‘‘(B) tangible property,
which is a capital asset or property used in the trade
or business (as defined in section 1231(b)).
‘‘(2) STOCK
IN
CERTAIN
FOREIGN
CORPORA-
TIONS INCLUDED.—For purposes of this section—
‘‘(A) IN
GENERAL.—The term ‘indexed
asset’ includes common stock in a foreign cor-
poration which is regularly traded on an estab-
lished securities market.
‘‘(B) 
EXCEPTION.—Subparagraph 
(A)
shall not apply to—
‘‘(i) stock of a foreign investment
company (within the meaning of section
1246(b)),
‘‘(ii) stock in a passive foreign invest-
ment company (as defined in section
1296),
‘‘(iii) stock in a foreign corporation
held by a United States person who meets
the requirements of section 1248(a)(2),
and
‘‘(iv) stock in a foreign personal hold-
ing company (as defined in section 552).
‘‘(C) TREATMENT OF AMERICAN DEPOSI-
TORY RECEIPTS.—An American depository re-
ceipt for common stock in a foreign corporation
shall be treated as common stock in such cor-
poration.
‘‘(c) 
INDEXED
BASIS.—For 
purposes 
of 
this
section—
‘‘(1) GENERAL RULE.—The indexed basis for
any asset is—
‘‘(A) the adjusted basis of the asset, in-
creased by
‘‘(B) the applicable inflation adjustment.
‘‘(2) APPLICABLE INFLATION ADJUSTMENT.—
The applicable inflation adjustment for any asset is
an amount equal to—
‘‘(A) the adjusted basis of the asset, multi-
plied by
‘‘(B) the percentage (if any) by which—
‘‘(i) the chain-type price index for
GDP for the last calendar quarter ending
before the asset is disposed of, exceeds
‘‘(ii) the chain-type price index for
GDP for the last calendar quarter ending
before the asset was acquired by the tax-
payer.
The percentage under subparagraph (B) shall be
rounded to the nearest 1⁄10 of 1 percentage point.
‘‘(3) CHAIN-TYPE PRICE INDEX FOR GDP.—The
chain-type price index for GDP for any calendar
quarter is such index for such quarter (as shown in
the last revision thereof released by the Secretary of
Commerce before the close of the following calendar
quarter).
‘‘(d) SUSPENSION OF HOLDING PERIOD WHERE DI-
MINISHED
RISK
OF
LOSS; TREATMENT
OF
SHORT
SALES.—
‘‘(1) IN GENERAL.—If the taxpayer (or a re-
lated person) enters into any transaction which sub-
stantially reduces the risk of loss from holding any
asset, such asset shall not be treated as an indexed
asset for the period of such reduced risk.
‘‘(2) SHORT SALES.—
‘‘(A) IN GENERAL.—In the case of a short
sale of an indexed asset with a short sale period
in excess of 3 years, for purposes of this title,
the amount realized shall be an amount equal
to the amount realized (determined without re-
gard to this paragraph) increased by the appli-
cable inflation adjustment. In applying sub-
section (c)(2) for purposes of the preceding sen-
tence, the date on which the property is sold
short shall be treated as the date of acquisition
and the closing date for the sale shall be treat-
ed as the date of disposition.
‘‘(B) SHORT SALE PERIOD.—For purposes
of subparagraph (A), the short sale period be-
gins on the day that the 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 (de-
termined without regard to this sec-
tion) exceeds the entity’s net capital
gain for such year determined with re-
gard 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) REGULATED
INVESTMENT
COMPA-
NIES.—Stock in a regulated investment com-
pany (within the meaning of section 851) shall
be an indexed asset for any calendar quarter in
the same ratio as—
‘‘(i) the average of the fair market
values of the indexed assets held by such
company at the close of each month during
such quarter, bears to
‘‘(ii) the average of the fair market
values of all assets held by such company
at the close of each such month.
‘‘(B) 
REAL
ESTATE
INVESTMENT
TRUSTS.—Stock in a real estate investment
trust (within the meaning of section 856) shall
be an indexed asset for any calendar quarter in
the same ratio as—
‘‘(i) the fair market value of the in-
dexed assets held by such trust at the close
of such quarter, bears to
‘‘(ii) the fair market value of all as-
sets held by such trust at the close of such
quarter.
‘‘(4) 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.
‘‘(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.
‘‘(4) INDEXING ADJUSTMENT DISREGARDED IN
DETERMINING LOSS ON SALE OF INTEREST IN ENTI-
TY.—Notwithstanding the preceding provisions of
this subsection, for purposes of determining the
amount of any loss on a sale or exchange of an in-
terest in a partnership, S corporation, or common
trust fund, the adjustment made under subsection
(a) shall not be taken into account in determining
the adjusted basis of such interest.
‘‘(g) 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.
‘‘(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 OF IMPROVEMENTS, ETC.—If
there is an addition to the adjusted basis of any tan-
gible property or of any stock in a corporation dur-
ing the taxable year by reason of an improvement to
such property or a contribution to capital of such
corporation—
‘‘(A) such addition shall never be taken
into account under subsection (c)(1)(A) if the
aggregate amount thereof during the taxable
year with respect to such property or stock is
less than $1,000, and
‘‘(B) such addition shall be treated as a
separate asset acquired at the close of such tax-
able year if the aggregate amount thereof dur-
ing the taxable year with respect to such prop-
erty or stock is $1,000 or more.
A rule similar to the rule of the preceding sentence
shall apply to any other portion of an asset to the
extent that separate treatment of such portion is ap-
propriate to carry out the purposes of this section.
‘‘(2) ASSETS WHICH ARE NOT INDEXED ASSETS
THROUGHOUT HOLDING PERIOD.—The applicable in-
flation adjustment shall be appropriately reduced for
periods during which the asset was not an indexed
asset.
‘‘(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)(1) to an
asset while such asset was held by the taxpayer, the
date of acquisition of such asset by the taxpayer
shall be treated as not earlier than the date of the
most recent such prior application.
‘‘(5) COLLAPSIBLE CORPORATIONS.—The appli-
cation of section 341(a) (relating to collapsible cor-
porations) shall be determined without regard to this
section.
‘‘(j) 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 II of subchapter O of chapter 1 of such Code
is amended by inserting after the item relating to section
1022 the following new item:
‘‘Sec. 1023. Indexing of certain assets acquired after December
31, 2001, for purposes of determining gain.’’.
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by
this section shall apply to the disposition of any
property the holding period of which begins after
December 31, 2001.
(2) CERTAIN
TRANSACTIONS
BETWEEN
RE-
LATED PERSONS.—The amendments made by this
section shall not apply to the disposition of any
property acquired after December 31, 2001, from a
related person (as defined in section 1023(g)(2) of
the Internal Revenue Code of 1986, as added by this
section) 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.
(d) ELECTION TO RECOGNIZE GAIN
ON ASSETS
HELD ON JANUARY 1, 2002.—For purposes of the Inter-
nal Revenue Code of 1986—
(1) IN GENERAL.—A taxpayer other than a cor-
poration may elect to treat—
(A) any readily tradable stock (which is an
indexed asset) held by such taxpayer on Janu-
ary 1, 2002, and not sold before the next busi-
ness day after such date, as having been sold
on such next business day for an amount equal
to its closing market price on such next busi-
ness day (and as having been reacquired on
such next business day for an amount equal to
such closing market price), and
(B) any other indexed asset held by the
taxpayer on January 1, 2001, as having been
sold on such date for an amount equal to its
fair market value on such date (and as having
been reacquired on such date for an amount
equal to such fair market value).
(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 date the asset is treated as
sold under paragraph (1) and shall be recog-
nized notwithstanding any provision of the In-
ternal Revenue Code of 1986.
(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
of the Treasury or his delegate may prescribe and
shall specify the assets for which such election is
made. Such an election, once made with respect to
any asset, shall be irrevocable.
(4) READILY TRADABLE STOCK.—For purposes
of this subsection, the term ‘‘readily tradable stock’’
means any stock which, as of January 1, 2002, is
readily tradable on an established securities market
or otherwise.
SEC. 3. REPEAL OF SPECIAL RATES OF TAX ON CAPITAL
GAIN.
(a) IN GENERAL.—Section 1 of the Internal Revenue
Code of 1986 is amended by striking subsection (h).
(b) CONFORMING AMENDMENTS.—
(1) Section 641(c)(2)(A) of such Code is
amended by striking ‘‘Except as provided in section
1(h), the’’ and inserting ‘‘The’’.
(2) Paragraph (4) of section 691(c) of such
Code is amended by striking ‘‘1(h),’’.
(3) 
The 
second 
sentence 
of 
section
7518(g)(6)(A) of such Code is amended to read as
follows:
‘‘In the case of a corporation, with respect to the
portion of any nonqualified withdrawal made out of
the capital gain account during a taxable year to
which section 1201(a) applies, the rate of tax taken
into account under the preceding sentence shall not
exceed 34 percent.’’
(4) The second sentence of section 607(h)(6)(A)
of the Merchant Marine Act, 1936, is amended to
read as follows:
‘‘In the case of a corporation, with respect to the
portion of any nonqualified withdrawal made out of
the capital gain account during a taxable year to
which section 1201(a) of the Internal Revenue Code
of 1986 applies, the rate of tax taken into account
under the preceding sentence shall not exceed 34
percent.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to any disposition of property to
which the amendments made by section 2 apply.
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