I 
108TH CONGRESS 
1ST SESSION 
H. R. 44
To amend the Internal Revenue Code of 1986 to provide reduced capital 
gain rates for qualified economic stimulus gain and to index the basis 
of assets of individuals for purposes of determining gains and losses. 
IN THE HOUSE OF REPRESENTATIVES 
JANUARY 7, 2003
Mr. DREIER (for himself, Mr. HALL, Ms. DUNN, Ms. MCCARTHY of Missouri, 
Mr. ENGLISH, Mr. SESSIONS, Mr. TOOMEY, and Mr. MANZULLO) intro-
duced the following bill; which was referred to the Committee on Ways 
and Means 
A BILL 
To amend the Internal Revenue Code of 1986 to provide 
reduced capital gain rates for qualified economic stimulus 
gain 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 
‘‘Investment Tax Incentive Act of 2003’’. 
(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. REDUCED CAPITAL GAIN RATES FOR QUALIFIED 
ECONOMIC STIMULUS GAIN.
(a) MAXIMUM CAPITAL GAIN RATE FOR INDIVID-
UALS.—
(1) IN
GENERAL.—Paragraph (2) of section 
1(h) (relating to reduced capital gain rates for quali-
fied 5-year gain) is amended to read as follows: 
‘‘(2) REDUCED
CAPITAL
GAIN
RATES
FOR 
QUALIFIED
5-YEAR
GAIN, 
QUALIFIED
ECONOMIC 
STIMULUS GAIN, AND QUALIFIED SECTION 1202 ECO-
NOMIC STIMULUS GAIN.—
‘‘(A) REDUCTION IN 10-PERCENT RATE.—
The rate under paragraph (1)(B) shall be—
‘‘(i) 5 percent with respect to so much 
of the amount to which the 10-percent rate 
would otherwise apply as does not exceed 
qualified economic stimulus gain, 
‘‘(ii) 8 percent with respect to so 
much of such amount not taken into ac-
count under clause (i) as does not exceed 
qualified 5-year gain, and
‘‘(iii) 10 percent with respect to the 
remainder of such amount. 
‘‘(B) REDUCTION IN 20-PERCENT RATE.—
The rate under paragraph (1)(C) shall be—
‘‘(i) 10 percent with respect to so 
much of the amount to which the 20-per-
cent rate would otherwise apply as does 
not exceed the excess of qualified economic 
stimulus gain over the amount of such 
gain taken into account under subpara-
graph (A)(i), 
‘‘(ii) 18 percent with respect to so 
much of such amount not taken into ac-
count under clause (i) as does not exceed 
the lesser of—
‘‘(I) the excess of qualified 5-year 
gain over the amount of such gain 
taken into account under subpara-
graph (A)(ii), or 
‘‘(II) the amount of qualified 5-
year gain (determined by taking into 
account only property the holding pe-
riod for which begins after December 
31, 2000), and
‘‘(iii) 20 percent with respect to the 
remainder of such amount. 
For purposes of determining under clause 
(ii)(II) whether the holding period of property 
begins after December 31, 2000, the holding 
period of property acquired pursuant to the ex-
ercise of an option (or other right or obligation 
to acquire property) shall include the period 
such option (or other right or obligation) was 
held. 
‘‘(C) REDUCTION IN 28-PERCENT RATE.—
The rate under paragraph (1)(E) shall be—
‘‘(i) 14 percent with respect to so 
much of the amount to which the 28-per-
cent rate would otherwise apply as does 
not exceed qualified section 1202 economic 
stimulus gain, and 
‘‘(ii) 28 percent with respect to the re-
mainder of such amount.’’. 
(2) QUALIFIED
ECONOMIC
STIMULUS
GAIN; 
QUALIFIED
SECTION
1202
ECONOMIC
STIMULUS 
GAIN.—Subsection (h) of section 1 (relating to max-
imum capital gains rate) is amended by adding at 
the end the following new paragraphs:
‘‘(13) QUALIFIED ECONOMIC STIMULUS GAIN.—
For purposes of this subsection, the term ‘qualified 
economic stimulus gain’ means the aggregate long-
term capital gain from property the holding period 
for which begins during the 2-year period beginning 
on the date of the enactment of this paragraph. The 
determination under the preceding sentence shall be 
made without regard to collectibles gain, gain de-
scribed in paragraph (7)(A)(i), and section 1202 
gain. 
‘‘(14) QUALIFIED
SECTION
1202
ECONOMIC 
STIMULUS GAIN.—For purposes of this subsection, 
the term ‘qualified section 1202 economic stimulus 
gain’ means the aggregate section 1202 gain from 
property the holding period for which begins during 
the 2-year period beginning on the date of the enact-
ment of this paragraph.’’. 
(3) EXCLUSION OF QUALIFIED ECONOMIC STIM-
ULUS GAIN FROM QUALIFIED 5-YEAR GAIN.—Para-
graph (9) of section 1(h) is amended by inserting 
‘‘qualified economic stimulus gain,’’ before ‘‘collect-
ibles gain’’. 
(b) MAXIMUM CAPITAL GAIN RATE FOR CORPORA-
TIONS.—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 qualified economic stimulus gain, then, in 
lieu of any tax imposed by sections 11, 511, and 831(a) 
and (b), 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 qualified economic stimulus 
gain, at the rates and in the manner as if this sub-
section had not been enacted, plus 
‘‘(2) a tax of 20 percent of the qualified eco-
nomic stimulus gain (or, if less, taxable income). 
‘‘(b) QUALIFIED ECONOMIC STIMULUS GAIN.—For 
purposes of this section, the term ‘qualified economic stim-
ulus gain’ has the meaning given such term in section 
1(h)(13), except that such gain shall not exceed the net 
capital gain. 
‘‘(c) REGULATIONS.—Rules similar to the rules of 
section 1(h)(11) shall apply for purposes of this section. 
‘‘(d) 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).’’
(c) 
CONFORMING
AMENDMENT.—Section 
857(b)(3)(A)(ii) is amended by striking ‘‘determined at 
the rate provided in section 1201(a)’’ and inserting ‘‘, de-
termined as provided in section 1201(a),’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
the date of the enactment of this Act. 
SEC. 3. 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 redesignating section 1023 as section 1024 
and by inserting after section 1022 the following new sec-
tion: 
‘‘SEC. 1023. 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 sec-
tion—
‘‘(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, 2002). 
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 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-
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-