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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 /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.
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.