Repeals the maximum capital gains rate provisions of the IRC.
[Congressional Bills 107th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3071 Introduced in House (IH)]
107th CONGRESS
1st Session
H. R. 3071
To amend the Internal Revenue Code of 1986 to index the basis of assets
acquired after December 31, 2001, for purposes of determining gain.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
October 9, 2001
Mr. Smith of Michigan introduced the following bill; which was referred
to the Committee on Ways and Means
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to index the basis of assets
acquired after December 31, 2001, for purposes of determining gain.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Capital Gains Tax Fairness Act of
2001''.
SEC. 2. INDEXING OF CERTAIN ASSETS ACQUIRED AFTER DECEMBER 31, 2000,
FOR PURPOSES OF DETERMINING GAIN.
(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 1022 the following
new section:
``SEC. 1023. INDEXING OF CERTAIN ASSETS ACQUIRED AFTER DECEMBER 31,
2001, FOR PURPOSES OF DETERMINING GAIN.
``(a) General Rule.--
``(1) Indexed basis substituted for adjusted basis.--Solely
for purposes of determining gain on the sale or other
disposition by a taxpayer (other than a corporation) of an
indexed asset which has been held for more than 3 years, the
indexed basis of the asset shall be substituted for its
adjusted basis.
``(2) Exception for depreciation, etc.--The deductions for
depreciation, depletion, and amortization shall be determined
without regard to the application of paragraph (1) to the
taxpayer or any other person.
``(3) Exception for principal residences.--Paragraph (1)
shall not apply to any disposition of the principal residence
(within the meaning of section 121) of the taxpayer .
``(b) Indexed Asset.--
``(1) In general.--For purposes of this section, 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 corporations included.--For
purposes of this section--
``(A) In general.--The term `indexed asset'
includes common stock in a foreign corporation which is
regularly traded on an established 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
investment 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 holding
company (as defined in section 552).
``(C) Treatment of american depository receipts.--
An American depository receipt for common stock in a
foreign corporation shall be treated as common stock in
such corporation.
``(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, increased 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, multiplied
by
``(B) the percentage (if any) by which--
``(i) the chain-type price index for GDP
for the last calendar quarter ending before the
asset is disposed of, exceeds
``(ii) the chain-type price index for GDP
for the last calendar quarter ending before the
asset was acquired by the taxpayer.
The percentage under subparagraph (B) shall be rounded to the
nearest \1/10\ of 1 percentage point.
``(3) Chain-type price index for gdp.--The chain-type price
index for GDP for any calendar quarter is such index for such
quarter (as shown in the last revision thereof released by the
Secretary of Commerce before the close of the following
calendar quarter).
``(d) Suspension of Holding Period Where Diminished Risk of Loss;
Treatment of Short Sales.--
``(1) In general.--If the taxpayer (or a related person)
enters into any transaction which substantially 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 regard to this paragraph)
increased by the applicable inflation adjustment. In
applying subsection (c)(2) for purposes of the
preceding sentence, 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 treated as
the date of disposition.
``(B) Short sale period.--For purposes of
subparagraph (A), the short sale period begins 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 purposes of determining the earnings and
profits of such entity).
``(B) Exception for corporate shareholders.--Under
regulations--
``(i) in the case of a distribution by a
qualified investment entity (directly or
indirectly) 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
(determined without regard to this
section) exceeds the entity's net
capital gain for such year determined
with regard to this section, and
``(ii) there shall be other appropriate
adjustments (including deemed distributions) so
as to ensure that the benefits of this section
are not allowed (directly or indirectly) to
corporate shareholders of qualified 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 imposed 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 increased 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
determined with reference to capital gain
dividends 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 company 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 paragraph (4), (5), or (6)
of section 857(b).
``(2) Adjustments to interests held in entity.--
``(A) Regulated investment companies.--Stock in a
regulated investment company (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 indexed
assets held by such trust at the close of such
quarter, bears to
``(ii) the fair market value of all assets
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 investment 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 distributions.--Except
as otherwise provided by the Secretary, a distribution with
respect to stock in a qualified investment entity which is not
a dividend and which results in a reduction in the adjusted
basis of such stock shall be treated as allocable to stock
acquired by the taxpayer in the order in which such stock was
acquired.
``(4) 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).
``(f) Other Pass-Thru Entities.--
``(1) Partnerships.--
``(A) In general.--In the case of a partnership,
the adjustment made under subsection (a) at the
partnership level shall be passed through to the
partners.
``(B) Special rule in the case of section 754
elections.--In the case of a transfer of an interest in
a partnership with respect to which the election
provided in section 754 is in effect--
``(i) the adjustment under section
743(b)(1) shall, with respect to the transferor
partner, be treated as a sale of the
partnership assets for purposes of applying
this section, and
``(ii) with respect to the transferee
partner, the partnership's holding period for
purposes of this section in such assets shall
be treated as beginning on the date of such
adjustment.
``(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. This section shall
not apply for purposes of determining the amount of any tax
imposed by section 1374 or 1375.
``(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.
``(4) Indexing adjustment disregarded in determining loss
on sale of interest in entity.--Notwithstanding the preceding
provisions of this subsection, for purposes of determining the
amount of any loss on a sale or exchange of an interest in a
partnership, S corporation, or common trust fund, the
adjustment made under subsection (a) shall not be taken into
account in determining the adjusted basis of such interest.
``(g) 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.
``(h) 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.
``(i) Special Rules.--For purposes of this section--
``(1) Treatment of improvements, etc.--If there is an
addition to the adjusted basis of any tangible property or of
any stock in a corporation during 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 taxable year if the
aggregate amount thereof during the taxable year with
respect to such property 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 appropriate to carry out
the purposes of this section.
``(2) Assets which are not indexed assets throughout
holding period.--The applicable inflation adjustment shall be
appropriately reduced for periods during which the asset was
not an indexed asset.
``(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)(1) to an asset while such asset was held by the taxpayer,
the date of acquisition of such asset by the taxpayer shall be
treated as not earlier than the date of the most recent such
prior application.
``(5) Collapsible corporations.--The application of section
341(a) (relating to collapsible corporations) shall be
determined without regard to this section.
``(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 of such Code is amended by inserting after
the item relating to section 1022 the following new item:
``Sec. 1023. Indexing of certain assets
acquired after December 31,
2001, for purposes of
determining gain.''.
(c) Effective Dates.--
(1) In general.--The amendments made by this section shall
apply to the disposition of any property the holding period of
which begins after December 31, 2001.
(2) Certain transactions between related persons.--The
amendments made by this section shall not apply to the
disposition of any property acquired after December 31, 2001,
from a related person (as defined in section 1023(g)(2) of the
Internal Revenue Code of 1986, as added by this section) if--
(A) such property was so acquired for a price less
than the property's fair market value, and
(B) the amendments made by this section did not
apply to such property in the hands of such related
person.
(d) Election To Recognize Gain on Assets Held on January 1, 2002.--
For purposes of the Internal Revenue Code of 1986--
(1) In general.--A taxpayer other than a corporation may
elect to treat--
(A) any readily tradable stock (which is an indexed
asset) held by such taxpayer on January 1, 2002, and
not sold before the next business day after such date,
as having been sold on such next business day for an
amount equal to its closing market price on such next
business day (and as having been reacquired on such
next business day for an amount equal to such closing
market price), and
(B) any other indexed asset held by the taxpayer on
January 1, 2001, as having been sold on such date for
an amount equal to its fair market value on such date
(and as having been reacquired on such date for an
amount equal to such fair market value).
(2) Treatment of gain or loss.--
(A) Any gain resulting from an election under
paragraph (1) shall be treated as received or accrued
on the date the asset is treated as sold under
paragraph (1) and shall be recognized notwithstanding
any provision of the Internal Revenue Code of 1986.
(B) Any loss resulting from an election under
paragraph (1) shall not be allowed for any taxable
year.
(3) Election.--An election under paragraph (1) shall be
made in such manner as the Secretary of the Treasury or his
delegate may prescribe and shall specify the assets for which
such election is made. Such an election, once made with respect
to any asset, shall be irrevocable.
(4) Readily tradable stock.--For purposes of this
subsection, the term ``readily tradable stock'' means any stock
which, as of January 1, 2002, is readily tradable on an
established securities market or otherwise.
SEC. 3. REPEAL OF SPECIAL RATES OF TAX ON CAPITAL GAIN.
(a) In General.--Section 1 of the Internal Revenue Code of 1986 is
amended by striking subsection (h).
(b) Conforming Amendments.--
(1) Section 641(c)(2)(A) of such Code is amended by
striking ``Except as provided in section 1(h), the'' and
inserting ``The''.
(2) Paragraph (4) of section 691(c) of such Code is amended
by striking ``1(h),''.
(3) The second sentence of section 7518(g)(6)(A) of such
Code is amended to read as follows:
``In the case of a corporation, with respect to the portion of
any nonqualified withdrawal made out of the capital gain
account during a taxable year to which section 1201(a) applies,
the rate of tax taken into account under the preceding sentence
shall not exceed 34 percent.''
(4) The second sentence of section 607(h)(6)(A) of the
Merchant Marine Act, 1936, is amended to read as follows:
``In the case of a corporation, with respect to the portion of
any nonqualified withdrawal made out of the capital gain
account during a taxable year to which section 1201(a) of the
Internal Revenue Code of 1986 applies, the rate of tax taken
into account under the preceding sentence shall not exceed 34
percent.''
(c) Effective Date.--The amendments made by this section shall
apply to any disposition of property to which the amendments made by
section 2 apply.
<all>
Introduced in House
Introduced in House
Referred to the House Committee on Ways and Means.
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