I
106TH CONGRESS
1ST SESSION
H. R. 1703
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
MAY 5, 1999
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 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. 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 asset 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 tax imposed by this
chapter for such taxable year shall be increased by
the amount of interest determined under paragraph
(2) with respect to each prior taxable year during
any portion of which the constructive ownership
transaction was open. Any amount payable under
this paragraph shall be taken into account in com-
puting the amount of any deduction allowable to the
taxpayer for interest paid or accrued during such
taxable year.
‘‘(2) AMOUNT OF INTEREST.—The amount of
interest determined under this paragraph with re-
spect to a prior taxable year is the amount of inter-
est which would have been imposed under section
6601 on the underpayment of tax for such year
which would have resulted if the gain (which is
treated as short-term gain by reason of subsection
(a)(1)) had been included in gross income in the tax-
able years in which it accrued (determined by treat-
ing the gain as accruing at a constant rate equal to
the applicable Federal rate as in effect on the day
the transaction closed). The period during which
such interest shall accrue shall end on the due date
(without extensions) for the return of tax imposed
by this chapter for the taxable year in which such
transaction closed.
‘‘(3) APPLICABLE
FEDERAL
RATE.—For pur-
poses of paragraph (2), the applicable Federal rate
is the applicable Federal rate determined under
1274(d) (compounded semiannually) which would
apply to a debt instrument with a term equal to the
period the transaction was open.
‘‘(4) 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 this chapter, or
‘‘(B) the amount of the tax imposed by
section 55.
‘‘(c) FINANCIAL
ASSET.—For purposes of this
section—
‘‘(1) IN GENERAL.—The term ‘financial asset’
means—
‘‘(A) any equity interest in any pass-thru
entity, and
‘‘(B) 
to 
the 
extent 
provided 
in
regulations—
‘‘(i) any debt instrument, and
‘‘(ii) any stock in a corporation which
is not a pass-thru entity.
‘‘(2) PASS-THRU
ENTITY.—For purposes of
paragraph (1), the term ‘pass-thru entity’ means—