To amend the Internal Revenue Code of 1986 to reduce the capital gains tax on stock of domestic corporations engaged in manufacturing and to index the basis of such stock for inflation.

SECTION 1. REDUCTION IN INDIVIDUAL CAPITAL GAINS RATE ON STOCK OF 
              DOMESTIC MANUFACTURERS.

    (a) General Rule.--Subsection (h) of section 1 of the Internal 
Revenue Code of 1986 (relating 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, then the tax imposed by this section 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 
                the taxable income reduced by the net capital gain,
                    ``(B) 19 percent of the lesser of--
                            ``(i) the 6-year qualified gain for the 
                        taxable year, or
                            ``(ii) the portion of the taxpayer's 
                        taxable income for the taxable year which would 
                        be taxed at a rate in excess of 15 percent 
                        (determined without regard to this subsection),
                    ``(C) the 23.5 percent of the lesser of--
                            ``(i) the 3-year qualified gain for the 
                        taxable year, or
                            ``(ii) the excess of the amount described 
                        in subparagraph (B)(ii) for the taxable year 
                        over the 6-year qualified gain for such taxable 
                        year, and
                    ``(D) 28 percent of the excess (if any) of the net 
                capital gain for the taxable year over the sum of the 
                amounts taken into account under subparagraphs (B) and 
                (C).
            ``(2) 3-year qualified gain.--For purposes of this 
        subsection, the term `3-year qualified gain' means the lesser 
        of--
                    ``(A) the net capital gain for the taxable year, or
                    ``(B) the net capital gain for the taxable year 
                determined by taking into account only gain or loss 
                from the sale or exchange of qualified manufacturer's 
                stock with a post-1994 holding period of at least 3 
                years but less than 6 years.
            ``(3) 6-year qualified gain.--For purposes of this 
        subsection, the term `6-year qualified gain' means the lesser 
        of--
                    ``(A) the excess of the net capital gain for the 
                taxable year over 3-year qualified gain, or
                    ``(B) the net capital gain for the taxable year 
                determined by taking into account only gain or loss 
                from the sale or exchange of qualified manufacturer's 
                stock with a post-1994 holding period of at least 6 
                years.
            ``(4) Qualified manufacturer's stock.--For purposes of this 
        subsection, the term `qualified manufacturer's stock' means 
        stock of any domestic C corporation if any trade or business of 
        such corporation is described in any 2-digit Standard 
        Industrial Classification Code relating to manufacturing.
            ``(5) Post-1994 holding period.--For purposes of this 
        subsection, the term `post-1994 holding period' means the 
        portion of the holding period after December 31, 1994.
            ``(6) Treatment of pass-thru entities.--
                    ``(A) In general.--In applying this subsection with 
                respect to any pass-thru entity, the determination of 
                the period for which any gain or loss is properly taken 
                into account shall be made at the entity level.
                    ``(B) Pass-thru entity.--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) Technical Amendments.--
            (1)(A) Section 170(e)(1)(B) of such Code is amended by 
        inserting ``the applicable percentage of'' before ``the amount 
        of gain''.
            (B) Section 170(e)(1) of such Code is amended by adding at 
        the end the following new sentence: ``For purposes of 
        subparagraph (B), the term `applicable percentage' means the 
        percentage determined by dividing the rate of tax imposed by 
        section 1(h) by 28, or, in the case of a corporation, the rate 
        of tax imposed by section 1201(a) by 35.''
            (2)(A) The second sentence of section 7518(g)(6)(A) of such 
        Code is amended by striking ``28 percent (34 percent in the 
        case of a corporation)'' and inserting ``the rate of tax 
        determined under such section''.
            (B) The second sentence of section 607(h)(6)(A) of the 
        Merchant Marine Act, 1936, is amended by striking ``28 percent 
        (34 percent in the case of a corporation)'' and inserting ``the 
        rate of tax determined under such section''.

SEC. 2. REDUCTION IN CORPORATE CAPITAL GAINS RATE ON STOCK OF DOMESTIC 
              MANUFACTURERS.

    (a) General Rule.--Section 1201 of the Internal Revenue Code of 
1986 (relating to alternative tax for corporations) is amended by 
redesignating subsection (b) as subsection (c) and by striking 
subsection (a) and inserting the following:
    ``(a) General Rule.--If for any taxable year a corporation has a 
net capital gain, then, in lieu of the tax imposed by section 11, 511, 
or 831(a) (whichever applies), there is hereby imposed a tax (if such 
tax is less than the tax imposed by such section) which shall consist 
of the sum of--
            ``(1) a tax computed on the taxable income reduced by the 
        net capital gain, at the same rates and in the same manner as 
        if this subsection had not been enacted,
            ``(2) 19 percent of the lesser of--
                    ``(A) the 6-year qualified gain for the taxable 
                year, or
                    ``(B) the portion of the taxpayer's taxable income 
                for the taxable year which would be taxed at a rate in 
                excess of 15 percent (determined without regard to this 
                subsection),
            ``(3) 23.5 percent of the lesser of--
                    ``(A) the 3-year qualified gain for the taxable 
                year, or
                    ``(B) the excess of the amount described in 
                paragraph (2)(B) for the taxable year over the 6-year 
                qualified gain for such taxable year, and
            ``(4) 35 percent of the excess (if any) of the net capital 
        gain for the taxable year over the sum of the amounts taken 
        into account under paragraph (2) and (3).
    ``(b) Definitions and Special Rule.--For purposes of subsection 
(a)--
            ``(1) 3-year qualified gain and 6-year qualified gain.--The 
        terms `3-year qualified gain' and `6-year qualified gain' have 
        the respective meanings given to such terms by section 1(h).
            ``(2) Treatment of pass-thru entities.--Section 1(h)(6) 
        shall apply for purposes of this section.''
    (b) Technical Amendment.--Clause (iii) of section 852(b)(3)(D) of 
such Code is amended by striking ``65 percent'' and inserting ``the 
applicable percentage '' and by adding at the end the following new 
sentence: ``For purposes of the preceding sentence, the term 
`applicable percentage' means 100 percent minus the percentage 
applicable under section 1201(a)).''.

SEC. 3. INDEXING OF QUALIFIED MANUFACTURER'S STOCK FOR PURPOSES OF 
              DETERMINING GAIN OR LOSS.

    (a) In General.--Part II of subchapter O of chapter 1 of the 
Internal Revenue Code of 1986 (relating to basis rules of general 
application) is amended by inserting after section 1021 the following 
new section:

``SEC. 1022. INDEXING OF QUALIFIED MANUFACTURER'S STOCK FOR PURPOSES OF 
              DETERMINING GAIN OR LOSS.

    ``(a) General Rule.--Except as otherwise provided in this 
subsection, if any qualified manufacturer's stock which has been held 
for more than 3 years (taking into account only the portion of the 
holding period after December 31, 1994) is sold or otherwise disposed 
of, for purposes of this title the indexed basis of the stock shall be 
substituted for its adjusted basis.
    ``(b) Qualified Manufacturer's Stock.--For purposes of this 
section, the term `qualified manufacturer's stock' means stock of any 
domestic C corporation if--
            ``(1) any trade or business of such corporation is 
        described in any 2-digit Standard Industrial Classification 
        Code relating to manufacturing, and
            ``(2) such stock is a capital asset in the hands of the 
        taxpayer.
    ``(c) Indexed Basis.--For purposes of this section--
            ``(1) General rule.--The indexed basis for any stock is--
                    ``(A) the adjusted basis of the stock, multiplied 
                by
                    ``(B) the applicable inflation ratio.
            ``(2) Applicable inflation ratio.--The applicable inflation 
        ratio for any stock is the percentage arrived at by dividing--
                    ``(A) the gross domestic product deflator for the 
                calendar quarter in which the disposition takes place, 
                by
                    ``(B) the gross domestic product deflator for the 
                calendar quarter in which the stock was acquired by the 
                taxpayer (or, if later, the calendar quarter ending on 
                December 31, 1994).
        The applicable inflation ratio shall never be less than 1. The 
        applicable inflation ratio for any stock shall be rounded to 
        the nearest \1/1000\.
            ``(3) Gross domestic product deflator.--The gross domestic 
        product deflator for any calendar quarter is the implicit price 
        deflator for the gross domestic product for such quarter (as 
        shown in the first revision thereof).
    ``(d) 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 purposes of determining the earnings and 
                profits of such entity).
                    ``(B) Exception for qualification purposes.--This 
                section shall not apply for purposes of sections 851(b) 
                and 856(c).
            ``(2) Adjustments to interests held in entity.--
                    ``(A) In general.--Stock in a qualified investment 
                entity shall be qualified manufacturer's stock for any 
                calendar month in the same ratio as the fair market 
                value of the qualified manufacturer's stock held by 
                such entity at the close of such month bears to the 
                fair market value of all assets of such entity at the 
                close of such month.
                    ``(B) Ratio of 90 percent or more.--If the ratio 
                for any calendar month determined under subparagraph 
                (A) would (but for this subparagraph) be 90 percent or 
                more, such ratio for such month shall be 100 percent.
                    ``(C) Ratio of 10 percent or less.--If the ratio 
                for any calendar month determined under subparagraph 
                (A) would (but for this subparagraph) be 10 percent or 
                less, such ratio for such month shall be zero.
                    ``(D) Valuation of assets in case of real estate 
                investment trusts.--Nothing in this paragraph shall 
                require a real estate investment trust to value its 
                assets more frequently than once each 36 months (except 
                where such trust ceases to exist). The ratio under 
                subparagraph (A) for any calendar month for which there 
                is no valuation shall be the trustee's good faith 
                judgment as to such valuation.
            ``(3) Qualified investment entity.--For purposes of this 
        subsection, the term `qualified investment 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).
    ``(e) Other Pass-Thru Entities.--
            ``(1) Partnerships.--In the case of a partnership, the 
        adjustment made under subsection (a) at the partnership level 
shall be passed through to the partners.
            ``(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.
            ``(3) Common trust funds.--In the case of a common trust 
        fund, the adjustment made under subsection (a) at the trust 
        level shall be passed through to the participants.
    ``(f) 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 purposes 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.
    ``(g) Transfers To Increase Indexing Adjustment.--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.
    ``(h) Special Rules.--For purposes of this section:
            ``(1) Treatment as separate stock.--A substantial 
        contribution to capital of a corporation shall be treated as 
        separate stock in such corporation.
            ``(2) Stock which is not qualified manufacturer's stock 
        throughout holding period.--The applicable inflation ratio 
        shall be appropriately reduced for periods during which stock 
        is not qualified manufacturer's stock.
            ``(3) Treatment of certain distributions.--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) to stock while such stock was held by the taxpayer, the 
        date of acquisition of such stock by the taxpayer shall be 
        treated as not earlier than the date of the most recent such 
        prior application.
    ``(i) 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 1021 the following new item:

                              ``Sec. 1022. Indexing of qualified 
                                        manufacturer's stock for 
                                        purposes of determining gain or 
                                        loss.''
    (c) Adjustment To Apply for Purposes of Determining Earnings and 
Profits.--Subsection (f) of section 312 of such Code (relating to 
effect on earnings and profits of gain or loss and of receipt of tax-
free distributions) is amended by adding at the end thereof the 
following new paragraph:
            ``(3) Effect on earnings and profits of indexed basis.--

                                For substitution of indexed basis for 
adjusted basis in the case of the disposition of qualified 
manufacturer's stock, see section 1022(a).''

SEC. 4. EFFECTIVE DATE.

    The amendments made by this Act shall apply to taxable years 
beginning after December 31, 1994.

Summary: Amends the Internal Revenue Code to reduce the rate of the individual and corporate capital gains tax on the sale or exchange of stock of qualified domestic manufacturers.  Provides for indexing the basis of such stock which has been held for more than three years.