SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``Long-Term 
Investment Incentive Act of 1997''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment 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 
provision of the Internal Revenue Code of 1986.

SEC. 2. REDUCTION OF TAX ON LONG-TERM CAPITAL GAINS ON ASSETS HELD MORE 
              THAN 2 YEARS.

    (a) In General.--Part I of subchapter P of chapter 1 (relating to 
treatment of capital gains) is amended by redesignating section 1202 as 
section 1203 and by inserting after section 1201 the following new 
section:

``SEC. 1202. CAPITAL GAINS DEDUCTION FOR ASSETS HELD BY NONCORPORATE 
              TAXPAYERS MORE THAN 2 YEARS.

    ``(a) General Rule.--If a taxpayer other than a corporation has a 
net capital gain for any taxable year, there shall be allowed as a 
deduction an amount equal to the sum of the applicable percentages of 
the classes of net capital gain described in the table under subsection 
(b).
    ``(b) Applicable Percentage.--For purposes of this subsection, the 
applicable percentage shall be the percentage determined in accordance 
with the following table:

          
                                                         The applicable
          ``In the case of:
                                                         percentage is:
                  2-year gain........................        7.145     
                  3-year gain........................        14.29     
                  4-year gain........................        21.45     
                  5-year gain........................        28.57     
                  6-year gain........................        35.71     
                  7-year gain........................        42.86     
                  8-year gain........................        50.00.    
    ``(c) Gain to Which Deduction Applies.--For purposes of this 
section--
            ``(1) 2-year gain.--The term `2-year gain' means the lesser 
        of--
                    ``(A) the net capital gain for the taxable year, or
                    ``(B) the amount of long-term capital gain which 
                would be computed for the taxable year if only gain 
                from the sale or exchange of property held by the 
                taxpayer for more than 2 years but not more than 3 
                years were taken into account.
            ``(2) 3-year gain, etc.--The terms `3-, 4-,
        5-, 6-, or 7-year gain' mean the amounts determined under 
        paragraph (1)--
                    ``(A) by reducing the amount of the net capital 
                gain under subparagraph (A) thereof by an amount equal 
                to the long-term capital gain from the sale or exchange 
                of property with a holding period less than the minimum 
                holding period for any such category, and
                    ``(B) by substituting 3, 4, 5, 6, or 7 years for 2 
                years and 4, 5, 6, 7, or 8 years for 3 years, 
                respectively, in subparagraph (B) thereof.
            ``(3) 8-year gain.--The term `8-year gain' means the lesser 
        of--
                    ``(A) the net capital gain for the taxable year, 
                reduced by in the same manner as under paragraph 
                (2)(A), or
                    ``(B) the amount of the long-term capital gain 
                which would be computed for the taxable year if only 
                gain from the sale or exchange of property held by the 
                taxpayer for more than 8 years were taken into account.
    ``(d) Estates and Trusts.--In the case of an estate or trust, the 
deduction under subsection (a) shall be computed by excluding the 
portion (if any) of the gains for the taxable year from sales or 
exchanges of capital assets which, under sections 652 and 662 (relating 
to inclusions of amounts in gross income of beneficiaries of trusts), 
is includible by the income beneficiaries as gain derived from the sale 
or exchange of capital assets.
    ``(e) Coordination With Treatment of Capital Gain Under Limitation 
on Investment Interest.--For purposes of this section, the net capital 
gain for any taxable year shall be reduced (but not below zero) by the 
amount which the taxpayer takes into account as investment income under 
section 163(d)(4)(B)(iii).
    ``(f) Treatment of Collectibles.--
            ``(1) In general.--Solely for purposes of this section, any 
        gain or loss from the sale or exchange of a collectible shall 
be treated as a short-term capital gain or loss (as the case may be), 
without regard to the period such asset was held. The preceding 
sentence shall apply only to the extent the gain or loss is taken into 
account in computing taxable income.
            ``(2) Treatment of certain sales of interest in 
        partnership, etc.--For purposes of paragraph (1), any gain from 
        the sale or exchange of an interest in a partnership, S 
        corporation, or trust which is attributable to unrealized 
        appreciation in the value of collectibles held by such entity 
        shall be treated as gain from the sale or exchange of a 
        collectible. Rules similar to the rules of section 751(f) shall 
        apply for purposes of the preceding sentence.
            ``(3) Collectible.--For purposes of this subsection, the 
        term `collectible' means any capital asset which is a 
        collectible (as defined in section 408(m) without regard to 
        paragraph (3) thereof).
    ``(g) Transitional Rule.--
            ``(1) In general.--Gain may be taken into account under 
        subsection (c) only if such gain is properly taken into account 
        on or after May 7, 1997.
            ``(2) Special rules for pass-thru entities.--
                    ``(A) In general.--In applying paragraph (1) with 
                respect to any pass-thru entity, the determination of 
                when gains and losses are properly taken into account 
                shall be made at the entity 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.''
    (b) Deduction Allowable in Computing Adjusted Gross Income.--
Subsection (a) of section 62 is amended by inserting after paragraph 
(16) the following new paragraph:
            ``(17) Long-term capital gains.--The deduction allowed by 
        section 1202.''
    (c) Maximum Capital Gains Rate.--Section 1(h) is amended by adding 
at the end the following new sentence: ``For purposes of this 
subsection, taxable income shall be computed without regard to the 
deduction allowed under section 1202.''
    (d) Treatment of Certain Pass-Thru Entities.--
            (1) Capital gain dividends of regulated investment 
        companies.--
                    (A) Subparagraph (B) of section 852(b)(3) is 
                amended to read as follows:
                    ``(B) Treatment of capital gain dividends by 
                shareholders.--A capital gain dividend shall be treated 
                by the shareholders as gain from the sale or exchange 
                of a capital asset held for more than 1 year but not 
                more than 2 years; except that the portion of any such 
                dividend designated by the company as allocable 2-, 3-, 
                4-, 5-, 6-, 7-, or 8-year gain of the company shall be 
                treated as gain from the sale or exchange of a capital 
                asset held for the amount of years in such class for 
                purposes of section 1202. Rules similar to the rules of 
                subparagraph (C) shall apply to any designation under 
                the preceding sentence.''
                    (B) Clause (i) of section 852(b)(3)(D) is amended 
                by adding at the end the following new sentence: 
                ``Rules similar to the rules of subparagraph (B) shall 
                apply in determining character of the amount to be so 
                included by any such shareholder.''
            (2) Capital gain dividends of real estate investment 
        trusts.--Subparagraph (B) of section 857(b)(3) is amended to 
        read as follows:
                    ``(B) Treatment of capital gain dividends by 
                shareholders.--A capital gain dividend shall be treated 
                by the shareholders or holders of beneficial interests 
                as gain from the sale or exchange of a capital asset 
                held for more than 1 year but not more than 2 years; 
                except that the portion of any such dividend designated 
                by the company as allocable to 2-, 3-, 4-, 5-, 6-, 7-, 
                or 8-year gain of the company shall be treated as gain 
                from the sale or exchange of a capital asset held for 
                the amount of years in such class for purposes of 
                section 1202. Rules similar to the rules of 
                subparagraph (C) shall apply to any designation under 
                the preceding sentence.''
            (3) Common trust funds.--Subsection (c) of section 584 is 
        amended--
                    (A) by inserting ``and not more than 2 years'' 
                after ``1 year'' each place it appears in paragraph 
                (2),
                    (B) by striking ``and'' at the end of paragraph 
                (2), and
                    (C) by redesignating paragraph (3) as paragraph (4) 
                and inserting after paragraph (2) the following new 
                paragraph:
            ``(3) as part of its gains from sales or exchanges of 
        capital assets held for periods described in the classes of 
        gains under section 1202(c), its proportionate share of the 
        gains of the common trust fund from sales or exchanges of 
        capital assets held for such periods, and''.
    (e) Technical and Conforming Changes.--
            (1) Subparagraph (B) of section 170(e)(1) is amended by 
        inserting ``(or, in the case of a taxpayer other than a 
        corporation, the percentage of such gain equal to 100 percent 
        minus the percentage applicable to such gain under section 
        1202(a))'' after ``the amount of gain''.
            (2) Subparagraph (B) of section 172(d)(2) is amended to 
        read as follows:
                    ``(B) the deduction under section 1202 and the 
                exclusion under section 1203 shall not be allowed.''
            (3)(A) Section 221 (relating to cross reference) is amended 
        to read as follows:

``SEC. 221. CROSS REFERENCES.

    ``(1) For deduction for net capital gains in the case of a taxpayer 
other than a corporation, see section 1202.
    ``(2) For deductions in respect of a decedent, see section 691.''
            (B) The table of sections for part VII of subchapter B of 
        chapter 1 is amended by striking ``reference'' in the item 
        relating to section 221 and inserting ``references''.
            (4) The last sentence of section 453A(c)(3) is amended by 
        striking all that follows ``long-term capital gain,'' and 
        inserting ``the maximum rate on net capital gain under section 
        1(h) or 1201 or the deduction under section 1202 (whichever is 
        appropriate) shall be taken into account.''
            (5) Paragraph (4) of section 642(c) is amended to read as 
        follows:
            ``(4) Adjustments.--To the extent that the amount otherwise 
        allowable as a deduction under this subsection consists of gain 
        from the sale or exchange of capital assets held for more than 
        1 year, proper adjustment shall be made for any deduction 
        allowable to the estate or trust under section 1202 or any 
        exclusion allowable to the estate or trust under section 
        1203(a). In the case of a trust, the deduction allowed by this 
        subsection shall be subject to section 681 (relating to 
        unrelated business income).''
            (6) The last sentence of paragraph (3) of section 643(a) is 
        amended to read as follows: ``The deduction under section 1202 
        and the exclusion under section 1203 shall not be taken into 
        account.''
            (7) Subparagraph (C) of section 643(a)(6) is amended by 
        inserting ``(i)'' before ``there shall'' and by inserting 
        before the period ``, and (ii) the deduction under section 1202 
        (relating to capital gains deduction) shall not be taken into 
        account''.
            (8) Paragraph (4) of section 691(c) is amended by striking 
        ``sections 1(h), 1201, and 1211'' and inserting ``sections 
        1(h), 1201, 1202, and 1211''.
            (9) The second sentence of section 871(a)(2) is amended by 
        inserting ``or 1203'' after ``1202''.
            (10) Subsection (d) of section 1044 is amended by striking 
        ``1202'' and inserting ``1203''.
            (11) Paragraph (1) of section 1402(i) is amended by 
        inserting ``, and the deduction provided by section 1202 shall 
        not apply'' before the period at the end thereof.
    (f) Clerical Amendment.--The table of sections for part I of 
subchapter P of chapter 1 is amended by inserting after the item 
relating to section 1201 the following new item:

                              ``Sec. 1202. Capital gains deduction for 
                                        assets held by noncorporate 
                                        taxpayers more than 2 years.''
    (g) Effective Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years ending on and after May 7, 1997.
            (2) Contributions.--The amendment made by subsection (e)(1) 
        shall apply to contributions on or after May 7, 1997.
Output: Long-Term Investment Incentive Act of 1997 - Amends the Internal Revenue Code to establish a sliding scale capital gains deduction on assets held between two years and eight years by noncorporate taxpayers.