I
106TH CONGRESS
1ST SESSION
H. R. 14
To amend the Internal Revenue Code of 1986 to provide maximum rates
of tax on capital gains of 14 percent for individuals and 28 percent
for corporations and to index the basis of assets of individuals for
purposes of determining gains and losses.
IN THE HOUSE OF REPRESENTATIVES
JANUARY 6, 1999
Mr. DREIER (for himself, Ms. MCCARTHY of Missouri, Mr. FORBES, Mr.
DEUTSCH, Mr. HALL of Texas, Mr. MORAN of Virginia, and Mr.
ENGLISH) introduced the following bill; which was referred to the Com-
mittee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to provide
maximum rates of tax on capital gains of 14 percent
for individuals and 28 percent for corporations and to
index the basis of assets of individuals for purposes
of determining gains and losses.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE, ETC.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Capital Gains Tax Reduction Act of 1999’’.
(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. 14 PERCENT MAXIMUM CAPITAL GAINS RATE FOR
INDIVIDUALS.
(a) IN GENERAL.—Subsection (h) of section 1 (relat-
ing 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, the tax imposed by
this section for such taxable year 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 taxable income reduced by the
net capital gain,
‘‘(B) 7.5 percent of so much of the tax-
payer’s net capital gain (or, if less, taxable in-
come) as does not exceed the excess (if any)
of—
‘‘(i) the amount of taxable income
which would (without regard to this para-
graph) be taxed at a rate of 15 percent or
less, over
‘‘(ii) the amount on which tax is de-
termined under subparagraph (A), plus
‘‘(C) 14 percent of the taxpayer’s net cap-
ital gain (or, if less, taxable income) in excess
of the amount of capital gain on which tax is
determined under subparagraph (B).
‘‘(2) NET CAPITAL GAIN TAKEN INTO ACCOUNT
AS INVESTMENT INCOME.—For purposes of this sub-
section, the net capital gain for any taxable year
shall be reduced (but not below zero) by the amount
which the taxpayer elects to take into account as in-
vestment income under section 163(d)(4)(B)(iii).’’
(b) MINIMUM TAX.—
(1) IN GENERAL.—Subparagraph (A) of section
55(b)(1) is amended by redesignating clauses (ii)
and (iii) as clauses (iii) and (iv), respectively, and by
inserting after clause (i) the following new clause:
‘‘(ii) MAXIMUM RATE OF TAX ON NET
CAPITAL
GAIN.—The amount determined
under the first sentence of clause (i) shall
not exceed the sum of—
‘‘(I) 
the 
amount 
determined
under such first sentence computed at
the rates and in the same manner as
if this clause had not been enacted on
the taxable excess reduced by the net
capital gain, plus
‘‘(II) a tax of 14 percent of the
lesser of the net capital gain or the
taxable excess.’’
(2) CONFORMING AMENDMENT.—Clause (iii) of
section 55(a)(1)(A) (as redesignated by paragraph
(1)) is amended by striking ‘‘clause (i)’’ and insert-
ing ‘‘this subparagraph’’.
(c) CONFORMING AMENDMENTS.—
(1) Section 1202 (relating to 50-percent exclu-
sion for gain from certain small business stock) is
hereby repealed.
(2)(A) Subsection (a) of section 57 is amended
by striking paragraph (7).
(B) Subclause (II) of section 53(d)(1)(B)(ii) is
amended by striking ‘‘, (5), and (7)’’ and inserting
‘‘and (5)’’.
(3) Paragraph (1) of section 170(e) of such
Code is amended by striking ‘‘the amount of gain’’
in the material following subparagraph (B)(ii) and
inserting ‘‘50 percent (80 percent in the case of a
corporation) of the amount of gain’’.
(4) 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, the amount
deductible on account of losses from sales or ex-
changes of capital assets shall not exceed the
amount includible on account of gains from sales or
exchanges of capital assets.’’
(5) Paragraph (4) of section 642(c) is amended
by striking the first sentence.
(6) Paragraph (3) of section 643(a) is amended
by striking the last sentence.
(7) Paragraph (4) of section 691(c) is amended
by striking ‘‘1202,’’.
(8) The second sentence of section 871(a)(2) is
amended by striking ‘‘such gains and losses shall be
determined without regard to section 1202 and’’.
(9) Subsection (a) of section 1044 is amended
by striking the last sentence.
(10) Paragraph (1) of section 1445(e) is
amended by striking ‘‘28 percent’’ and inserting ‘‘14
percent’’.
(11) Section 6652 is amended by striking sub-
section (k) and by redesignating subsections (l) and
(m) as subsections (k) and (l), respectively.
(12)(A) 
The 
second 
sentence 
of 
section
7518(g)(6)(A) is amended by striking ‘‘28 percent’’
and inserting ‘‘14 percent’’.
(B) 
The 
second 
sentence 
of 
section
607(h)(6)(A) of the Merchant Marine Act, 1936 is
amended by striking ‘‘28 percent’’ and inserting ‘‘14
percent’’.
(13) The table of sections for part I of sub-
chapter P of chapter 1 is amended by striking the
item relating to section 1202.
(d) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to taxable years beginning after Decem-
ber 31, 1998.
(2) WITHHOLDING.—The amendment made by
subsection (c)(10) shall apply to amounts paid after
the date of the enactment of this Act.
SEC. 3. 28 PERCENT MAXIMUM CAPITAL GAINS RATE FOR
CORPORATIONS.
(a) IN GENERAL.—Section 1201 is amended to read
as follows:
‘‘SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS.
‘‘(a) GENERAL RULE.—If for any taxable year a cor-
poration has a net capital gain, then, in lieu of the tax
imposed by sections 11, 511, and 831 (a) and (b) (which-
ever is applicable), there is hereby imposed a tax (if such
tax is less than the tax imposed by such sections) which
shall consist of the sum of—
‘‘(1) a tax computed on the taxable income re-
duced by the amount of the net capital gain, at the
rates and in the manner as if this subsection had
not been enacted, plus
‘‘(2) a tax of 28 percent of the net capital gain
(or, if less, taxable income).
‘‘(b) CROSS REFERENCES.—
‘‘For computation of the alternative tax—
‘‘(1) in the case of life insurance companies, see
section 801(a)(2),
‘‘(2) in the case of regulated investment compa-
nies and their shareholders, see section 852(b)(3)(A)
and (D), and
‘‘(3) in the case of real estate investment trusts,
see section 857(b)(3)(A).’’
(b) TECHNICAL AMENDMENTS.—
(1) Clause (iii) of section 852(b)(3)(D) is
amended by striking ‘‘65 percent’’ and inserting ‘‘72
percent’’.
(2) Subsection (e) of section 1445 is amended
by striking ‘‘35 percent’’ each place it appears and
inserting ‘‘28 percent’’.
(3)(A) 
The 
second 
sentence 
of 
section
7518(g)(6)(A) is amended by striking ‘‘34 percent’’
and inserting ‘‘28 percent’’.
(B) 
The 
second 
sentence 
of 
section
607(h)(6)(A) of the Merchant Marine Act, 1936 is
amended by striking ‘‘34 percent’’ and inserting ‘‘28
percent’’.
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to taxable years ending after December
31, 1998.
(2) WITHHOLDING.—The amendment made by
subsection (b)(2) shall apply to amounts paid after
the date of the enactment of this Act.
(d) TRANSITIONAL RULE.—
(1) IN GENERAL.—In the case of any taxable
year ending after December 31, 1998, and beginning
on or before such date, paragraph (2) of section
1201(a) of the Internal Revenue Code of 1986 (as
amended by this section) shall be applied as if it
read as follows:
‘‘(2) the sum of—
‘‘(A) a tax of 28 percent of the lesser of—
‘‘(i) the net capital gain for the tax-
able year, or
‘‘(ii) the net capital gain taking into
account only gain or loss properly taken
into account for the portion of the taxable
year after December 31, 1998, plus
‘‘(B) a tax of 35 percent of the excess of—
‘‘(i) the net capital gain for the tax-
able year, over
‘‘(ii) the amount of net capital gain
taken into account under subparagraph
(A).’’
(2) SPECIAL RULE FOR PASS-THRU ENTITIES.—
(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.
SEC. 4. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF
DETERMINING GAIN OR LOSS.
(a) IN GENERAL.—Part II of subchapter O of chap-
ter 1 (relating to basis rules of general application) is
amended by inserting after section 1021 the following new
section:
‘‘SEC. 1022. INDEXING OF CERTAIN ASSETS FOR PURPOSES
OF DETERMINING GAIN OR LOSS.
‘‘(a) GENERAL RULE.—
‘‘(1) INDEXED
BASIS
SUBSTITUTED
FOR
AD-
JUSTED BASIS.—Solely for purposes of determining
gain or loss on the sale or other disposition by a tax-
payer (other than a corporation) of an indexed asset
which has been held for more than 3 years, the in-
dexed basis of the asset shall be substituted for its
adjusted 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.
‘‘(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 
gross 
domestic 
product
deflator for the last calendar quarter end-
ing before the asset is disposed of, exceeds
‘‘(ii) the gross domestic product
deflator for the last calendar quarter end-
ing before the asset was acquired by the
taxpayer (or, if later, the calendar quarter
ending on December 31, 1998).
The percentage under subparagraph (B) shall be
rounded to the nearest 1⁄10 of 1 percentage point.
‘‘(3) GROSS DOMESTIC PRODUCT DEFLATOR.—
The gross domestic product deflator for any cal-
endar quarter is the implicit price deflator for the
gross domestic product for such quarter (as shown
in the last revision thereof released by the Secretary
of Commerce before the close of the following cal-
endar quarter).
‘‘(d) SUSPENSION OF HOLDING PERIOD WHERE DI-
MINISHED
RISK
OF
LOSS; TREATMENT
OF
SHORT
SALES.—
‘‘(1) IN GENERAL.—If the taxpayer (or a relat-
ed 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.
‘‘(C) RATIO OF 80 PERCENT OR MORE.—If
the ratio for any calendar quarter determined
under subparagraph (A) or (B) would (but for
this subparagraph) be 80 percent or more, such
ratio for such quarter shall be 100 percent.
‘‘(D) RATIO OF 20 PERCENT OR LESS.—If
the ratio for any calendar quarter determined
under subparagraph (A) or (B) would (but for
this subparagraph) be 20 percent or less, such
ratio for such quarter shall be zero.
‘‘(E) LOOK-THRU OF PARTNERSHIPS.—For
purposes of this paragraph, a qualified invest-
ment entity which holds a partnership interest
shall be treated (in lieu of holding a partnership
interest) as holding its proportionate share of
the assets held by the partnership.
‘‘(3) TREATMENT OF RETURN OF CAPITAL DIS-
TRIBUTIONS.—Except as otherwise provided by the
Secretary, a distribution with respect to stock in a
‘‘(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 is amended by
inserting after the item relating to section 1021 the follow-
ing new item:
‘‘Sec. 1022. Indexing of certain assets for purposes of determining
gain or loss.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to dispositions after December 31,
1998, in taxable years ending after such date.
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