H.R. 1584 (105th): Tax Freedom for Families Act of 1997

105th Congress, 1997–1998. Text as of May 13, 1997 (Introduced).

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HR 1584 IH

105th CONGRESS

1st Session

H. R. 1584

To amend the Internal Revenue Code of 1986 to provide all taxpayers with a 50 percent deduction for capital gains, to index the basis of certain capital assets, to provide credits for families, to phase-out the estate and gift taxes, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

May 13, 1997

Mr. SAM JOHNSON of Texas (for himself, Mr. BURTON of Indiana, Mr. TIAHRT, Mr. BARR of Georgia, Mr. CRANE, Mr. POMBO, Mr. LEWIS of Kentucky, Mr. HOSTETTLER, Mr. SESSIONS, Mr. CHABOT, Mr. BOB SCHAFFER of Colorado, and Mr. GRAHAM) 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 provide all taxpayers with a 50 percent deduction for capital gains, to index the basis of certain capital assets, to provide credits for families, to phase-out the estate and gift taxes, and for other purposes.

    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 ‘Tax Freedom for Families Act of 1997’.

TITLE I--INCENTIVES FOR CAPITAL FORMATION AND JOBS CREATION

SEC. 101. 50 PERCENT CAPITAL GAINS DEDUCTION.

    (a) GENERAL RULE- Section 1201 of the Internal Revenue Code of 1986 is amended to read as follows:

‘SEC. 1201. CAPITAL GAINS DEDUCTION.

    ‘(a) GENERAL RULE- If for any taxable year a taxpayer has a net capital gain, 50 percent of such gain shall be a deduction from gross income.

    ‘(b) ESTATES AND TRUSTS- In the case of an estate or trust, the deduction 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.

    ‘(c) 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).

    ‘(d) TRANSITIONAL RULES-

      ‘(1) IN GENERAL- In the case of a taxable year which includes January 1, 1997--

        ‘(A) the amount taken into account as the net capital gain under subsection (a) shall not exceed the net capital gain determined by only taking into account gains and losses properly taken into account for the portion of the taxable year on or after January 1, 1997, and

        ‘(B) the amount of the net capital gain taken into account in applying section 1(h) for such year shall be reduced by the amount taken into account under subparagraph (A) for such year.

      ‘(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 of such Code is amended by inserting after paragraph (16) the following new paragraph:

      ‘(17) LONG-TERM CAPITAL GAINS- The deduction allowed by section 1201.’

    (c) TECHNICAL AND CONFORMING CHANGES-

      (1)(A) Section 1 of such Code is amended by striking subsection (h).

      (B) Subsection (a) of section 1202 of such Code amended to read as follows:

    ‘(a) MAXIMUM CAPITAL GAINS RATE FOR CERTAIN SMALL BUSINESS STOCK-

      ‘(1) IN GENERAL- If for any taxable year a taxpayer other than a corporation has gain from the sale or exchange of any qualified small business stock held for more than 5 years, then the tax imposed by section 1 shall not exceed the sum of--

        ‘(A) a tax computed under section 1 on the taxable income reduced by 1/2 the amount of the small business gain, at the rates and in the manner as if this subsection had not been enacted, plus

        ‘(B) a tax of 14 percent of the small business gain.

      ‘(2) SMALL BUSINESS GAIN- For purposes of paragraph (1), the term ‘small business gain’ means the lesser of--

        ‘(A) gain from the sale or exchange of any qualified small business stock held for more than 5 years, or

        ‘(B) the net capital gain taken into account under section 1201(a).’

      (2) Section 12 of such Code is amended by striking paragraph (4) and redesignating the following paragraphs accordingly.

      (3)(A) Subsection (a) of section 57 of such Code is amended by striking paragraph (7).

      (B) Subclause (II) of section 53(d)(1)(B)(ii) of such Code is amended by striking ‘, (5), and (7)’ and inserting ‘and (5)’.

      (4) Paragraph (1) of section 170(e) of such Code is amended by striking ‘the amount of gain’ in the material following subparagraph (B)(ii) and inserting ‘50 percent of the amount of gain’.

      (5) Paragraph (2) of section 172(d) of such Code is amended to read as follows:

      ‘(2) CAPITAL GAINS AND LOSSES-

        ‘(A) LOSSES OF TAXPAYERS OTHER THAN CORPORATIONS- In the case of a taxpayer other than a corporation, the amount deductible on account of losses from sales or exchanges of capital assets shall not exceed the amount includible on account of gains from sales or exchanges of capital assets.

        ‘(B) DEDUCTION FOR CAPITAL GAINS- The deduction under section 1201 shall not be allowed.’

      (6) The last sentence of section 453A(c)(3) of such Code is amended by striking all that follows ‘long-term capital gain,’ and inserting ‘the deduction under section 1201 shall be taken into account.’.

      (7) Paragraph (2) of section 468B(b) of such Code is amended by inserting ‘the deduction allowed by section 1201 and by’ after ‘reduced by’.

      (8) Paragraph (2) of section 527(b) of such Code is hereby repealed.

      (9) Subparagraph (A) of section 641(d)(2) of such Code is amended by striking ‘Except as provided in section 1(h), the’ and inserting ‘The’.

      (10) Paragraph (4) of section 642(c) of such Code 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 1201 (relating to capital gains deduction). In the case of a trust, the deduction allowed by this subsection shall be subject to section 681 (relating to unrelated business income).’

      (11) The last sentence of section 643(a)(3) of such Code is amended to read as follows: ‘The deduction under section 1201 (relating to capital gains deduction) shall not be taken into account.’

      (12) Subparagraph (C) of section 643(a)(6) of such Code is amended by inserting ‘(i)’ before ‘there shall’ and by inserting before the period ‘, and (ii) the deduction under section 1201 (relating to capital gains deduction) shall not be taken into account’.

      (13) Paragraph (4) of section 691(c) of such Code is amended by striking ‘1(h),’.

      (14) Paragraph (2) of section 801(a) of such Code is hereby repealed.

      (15) Subsection (c) of section 831 of such Code is amended by striking paragraph (1) and redesignating the following paragraphs accordingly.

      (16)(A) Subparagraph (A) of section 852(b)(3) of such Code is amended by striking ‘, determined as provided in section 1201(a), on’ and inserting ‘of 17.5 percent of’.

      (B) Clause (iii) of section 852(b)(3)(D) of such Code is amended--

        (i) by striking ‘65 percent’ and inserting ‘82.5 percent’, and

        (ii) by striking ‘section 1201(a)’ and inserting ‘subparagraph (A)’.

      (17) Clause (ii) of section 857(b)(3)(A) of such Code is amended by striking ‘determined at the rate provided in section 1201(a) on’ and inserting ‘of 17.5 percent of’.

      (18) The second sentence of section 871(a)(2) of such Code is amended by striking ‘1202’ and inserting ‘1201’.

      (19) Paragraph (1) of section 882(a) of such Code is amended by striking ‘section 11, 55, 59A, or 1201(a)’ and inserting ‘section 11, 55, or 59A’.

      (20)(A) Paragraph (2) of section 904(b) of such Code is amended to read as follows:

      ‘(2) CAPITAL GAINS- Taxable income from sources outside the United States shall include gain from the sale or exchange of capital assets only to the extent of foreign source capital gain net income.’.

      (B) Paragraph (3) of section 904(b) of such Code is amended by striking subparagraphs (B), (D), and (E) and by redesignating subparagraph (C) as subparagraph (B).

      (21)(A) Paragraph (2) of section 1211(b) of such Code is amended to read as follows:

      ‘(2) the sum of--

        ‘(A) the excess of the net short-term capital loss over the net long-term capital gain, and

        ‘(B) one-half of the excess of the net long-term capital loss over the net short-term capital gain.’

      (B) So much of paragraph (2) of section 1212(b) of such Code as precedes subparagraph (B) thereof is amended to read as follows:

      ‘(2) SPECIAL RULES-

        ‘(A) ADJUSTMENTS-

          ‘(i) For purposes of determining the excess referred to in paragraph (1)(A), there shall be treated as short-term capital gain in the taxable year an amount equal to the lesser of--

            ‘(I) the amount allowed for the taxable year under paragraph (1) or (2) of section 1211(b), or

            ‘(II) the adjusted taxable income for such taxable year.

          ‘(ii) For purposes of determining the excess referred to in paragraph (1)(B), there shall be treated as short-term capital gain in the taxable year an amount equal to the sum of--

            ‘(I) the amount allowed for the taxable year under paragraph (1) or (2) of section 1211(b) or the adjusted taxable income for such taxable year, whichever is the least, plus

            ‘(II) the excess of the amount described in subclause (I) over the net short-term capital loss (determined without regard to this subsection) for such year.’

      (C) Subsection (b) of section 1212 is amended by adding at the end the following new paragraph:

      ‘(3) TRANSITIONAL RULE-

        ‘(A) IN GENERAL- The amount determined under subclause (II) of paragraph (2)(A)(ii) for any taxable year shall be reduced (but not below zero) by the excess of--

          ‘(i) the amount of the unused pre-1998 long-term capital loss for such year, over

          ‘(ii) the sum of the long-term capital gain and the net short-term capital gain for such taxable year.

        Section 1211(b)(2)(B) shall be applied without regard to ‘one-half of’ with respect to such excess for such taxable year.

        ‘(B) UNUSED PRE-1998 LONG-TERM CAPITAL LOSS- For purposes of this paragraph, the term ‘unused pre-1998 long-term capital loss’ means, with respect to a taxable year, the excess of--

          ‘(i) the amount which under paragraph (1)(B) (as in effect for taxable years beginning before January 1, 1998) is treated as a long-term capital loss for the taxpayer’s first taxable year beginning after December 31, 1997, over

          ‘(ii) the sum of--

            ‘(I) the aggregate amount determined under subparagraph (A)(ii) for all prior taxable years beginning after December 31, 1997, and

            ‘(II) the aggregate reductions under subparagraph (A) for all such prior taxable years.’

      (22) Subsection (b) of section 1374 of such Code is amended by striking paragraph (4).

      (23) Subsection (b) of section 1381 is amended by striking ‘or 1201’.

      (24) Paragraph (1) of section 1402(i) of such Code is amended by inserting ‘, and the deduction provided by section 1201 shall not apply’ before the period at the end thereof.

      (25) Subsection (e) of section 1445 of such Code is amended--

        (A) in paragraph (1) by striking ‘35 percent (or, to the extent provided in regulations, 28 percent)’ and inserting ‘17.5 percent (or, to the extent provided in regulations, 19.8 percent)’, and

        (B) in paragraph (2) by striking ‘35 percent’ and inserting ‘17.5 percent’.

      (26) Clause (i) of section 6425(c)(1)(A) of such Code is amended by striking ‘or 1201(a)’.

      (27) Clause (i) of section 6655(g)(1)(A) of such Code is amended by striking ‘or 1201(a)’.

      (28)(A) The second sentence of section 7518(g)(6)(A) of such Code is amended--

        (i) by striking ‘during a taxable year to which section 1(h) or 1201(a) applies’, and

        (ii) by striking ‘28 percent (34 percent’ and inserting ‘19.8 percent (17.5 percent’.

      (B) The second sentence of section 607(h)(6)(A) of the Merchant Marine Act, 1936 is amended--

        (i) by striking ‘during a taxable year to which section 1(h) or 1201(a) of such Code applies’, and

        (ii) by striking ‘28 percent (34 percent’ and inserting ‘19.8 percent (17.5 percent’.

      (29) The section heading for section 1202 is amended to read as follows:

‘SEC. 1202. SMALL BUSINESS STOCK ELIGIBLE FOR PREFERENTIAL RATE.’

      (30) The table of sections for part I of subchapter P of chapter 1 of such Code is amended to read as follows:

‘Sec. 1201. Capital gains deduction.

‘Sec. 1202. Small business stock eligible for preferential rate.’

    (d) EFFECTIVE DATES-

      (1) IN GENERAL- Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years ending after December 31, 1996.

      (2) REPEAL OF SECTION 1(h)- The amendments made by subsection (c)(1) shall apply to taxable years beginning after January 1, 1997.

      (3) CONTRIBUTIONS- The amendment made by subsection (c)(4) shall apply only to contributions on or after January 1, 1997.

      (4) USE OF LONG-TERM LOSSES- The amendments made by subsection (c)(21) shall apply to taxable years beginning after December 31, 1997.

      (5) WITHHOLDING- The amendment made by subsection (c)(25) shall apply only to amounts paid after the date of the enactment of this Act.

      (6) COORDINATION WITH PRIOR TRANSITION RULE- Any amount treated as long-term capital gain by reason of paragraph (3) of section 1122(h) of the Tax Reform Act of 1986 shall not be taken into account for purposes of applying section 1201 of the Internal Revenue Code of 1986 (as added by this section).

SEC. 102. INDEXING OF CERTAIN ASSETS ACQUIRED AFTER DECEMBER 31, 1996, 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 CERTAIN ASSETS ACQUIRED AFTER DECEMBER 31, 1996, FOR PURPOSES OF DETERMINING GAIN OR LOSS.

    ‘(a) GENERAL RULE-

      ‘(1) INDEXED BASIS SUBSTITUTED FOR ADJUSTED BASIS- Except as otherwise provided in this subsection, if an indexed asset which has been held for more than 3 years is sold or otherwise disposed of, for purposes of this title 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.

    ‘(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 gross domestic product deflator for the last calendar quarter ending before the asset is disposed of, exceeds

          ‘(ii) the gross domestic product deflator 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) 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 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 provided in subparagraph (B), 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) 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.

      ‘(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.

    ‘(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 ratio 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) SECTION CANNOT INCREASE ORDINARY LOSS- To the extent that (but for this paragraph) this section would create or increase a net ordinary loss to which section 1231(a)(2) applies or an ordinary loss to which any other provision of this title applies, such provision shall not apply. The taxpayer shall be treated as having a long-term capital loss in an amount equal to the amount of the ordinary loss to which the preceding sentence applies.

      ‘(5) 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.

      ‘(6) 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 is amended by inserting after the item relating to section 1021 the following new item:

‘Sec. 1022. Indexing of certain assets acquired after December 31, 1996, for purposes of determining gain or loss.’

    (c) EFFECTIVE DATE-

      (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, 1996.

      (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, 1996, from a related person (as defined in section 1022(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, 1997- For purposes of the Internal Revenue Code of 1986--

      (1) IN GENERAL- A taxpayer may elect to treat--

        (A) any readily tradable stock (which is an indexed asset) held by such taxpayer on January 1, 1997, 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, 1997, 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 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, 1997, is readily tradable on an established securities market or otherwise.

    (e) TREATMENT OF PRINCIPAL RESIDENCES- Property held and used by the taxpayer on January 1, 1997, as his principal residence (within the meaning of section 1034 of the Internal Revenue Code of 1986) shall be treated--

      (1) for purposes of subsection (c)(1) of this section and section 1022 of such Code, as having a holding period which begins on January 1, 1997, and

      (2) for purposes of section 1022(c)(2)(B)(ii) of such Code, as having been acquired on January 1, 1997.

    Subsection (d) shall not apply to property to which this subsection applies.

SEC. 103. CAPITAL LOSS DEDUCTION ALLOWED WITH RESPECT TO SALE OR EXCHANGE OF PRINCIPAL RESIDENCE.

    (a) IN GENERAL- Subsection (c) of section 165 of the Internal Revenue Code of 1986 (relating to limitation on losses of individuals) is amended by striking ‘and’ at the end of paragraph (2), by striking the period at the end of paragraph (3) and inserting ‘; and’, and by adding at the end the following new paragraph:

      ‘(4) losses arising from the sale or exchange of the principal residence (within the meaning of section 1034) of the taxpayer.’

    (b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to sales and exchanges after December 31, 1996, in taxable years ending after such date.

TITLE II--CREDITS FOR FAMILIES

SEC. 201. FAMILY TAX CREDIT.

    (a) IN GENERAL- Subpart A of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 is amended by inserting after section 23 the following new section:

‘SEC. 24. FAMILY TAX CREDIT.

    ‘(a) ALLOWANCE OF CREDIT- There shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to $500 multiplied by the number of qualifying children of the taxpayer.

    ‘(b) QUALIFYING CHILD- For purposes of this section--

      ‘(1) IN GENERAL- The term ‘qualifying child’ means any individual if--

        ‘(A) the taxpayer is allowed a deduction under section 151 with respect to such individual for such taxable year,

        ‘(B) such individual has not attained the age of 18 as of the close of the calendar year in which the taxable year of the taxpayer begins, and

        ‘(C) such individual bears a relationship to the taxpayer described in section 32(c)(3)(B) (determined without regard to clause (ii) thereof).

      ‘(2) EXCEPTION FOR CERTAIN NONCITIZENS- The term ‘qualifying child’ shall not include any individual who would not be a dependent if the first sentence of section 152(b)(3) were applied without regard to all that follows ‘resident of the United States’.’

    (b) CONFORMING AMENDMENT- The table of sections for subpart A of part IV of subchapter A of chapter 1 of such Code is amended by inserting after the item relating to section 23 the following new item:

‘Sec. 24. Family tax credit.’

    (c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 1996.

SEC. 202. CREDIT TO REDUCE MARRIAGE PENALTY.

    (a) IN GENERAL- Subpart A of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 is amended by inserting after section 24 the following new section:

‘SEC. 24A. CREDIT TO REDUCE MARRIAGE PENALTY.

    ‘(a) ALLOWANCE OF CREDIT- In the case of a joint return for the taxable year, there shall be allowed as a credit against the tax imposed by this chapter for such taxable year an amount equal to the marriage penalty reduction credit.

    ‘(b) LIMITATIONS-

      ‘(1) DOLLAR LIMITATION- The amount of credit allowed by subsection (a) for the taxable year shall not exceed $145.

      ‘(2) CREDIT DISALLOWED FOR INDIVIDUALS CLAIMING SECTION 911, ETC- No credit shall be allowed under this section for any taxable year if either spouse claims the benefits of section 911, 931, or 933 for such taxable year.

    ‘(c) MARRIAGE PENALTY REDUCTION CREDIT- For purposes of this section--

      ‘(1) IN GENERAL- The marriage penalty reduction credit is an amount equal to the excess (if any) of--

        ‘(A) the joint tax amount of the taxpayer, over

        ‘(B) the sum of the unmarried tax amounts for each spouse.

      ‘(2) UNMARRIED TAX AMOUNT- For purposes of paragraph (1), the unmarried tax amount, with respect to an individual, is the amount of tax which would be imposed by section 1(c) if such individual’s taxable income were equal to the excess (if any) of--

        ‘(A) such individual’s qualified earned income for the taxable year, over

        ‘(B) the sum of--

          ‘(i) an amount equal to the basic standard deduction under section 63(c)(2)(C) for the taxable year, plus

          ‘(ii) the exemption amount (as defined in section 151(d)) for such taxable year.

      ‘(3) JOINT TAX AMOUNT- For purposes of paragraph (1), the joint tax amount is the amount of tax which would be imposed by section 1(a) if the taxpayer’s taxable income were equal to the excess (if any) of--

        ‘(A) the taxpayer’s qualified earned income for the taxable year, over

        ‘(B) the sum of--

          ‘(i) an amount equal to the basic standard deduction under section 63(c)(2)(A) for the taxable year, plus

          ‘(ii) an amount equal to twice the exemption amount (as so defined) for such taxable year.

    ‘(d) QUALIFIED EARNED INCOME- For purposes of this section--

      ‘(1) IN GENERAL- The term ‘qualified earned income’ means an amount equal to the excess (if any) of--

        ‘(A) the earned income for the taxable year, over

        ‘(B) an amount equal to the sum of the deductions described in paragraphs (1), (2), (6), (7), and (12) of section 62(a) to the extent that such deductions are properly allocable to or chargeable against earned income for such taxable year.

      The amount of qualified earned income shall be determined without regard to any community property laws.

      ‘(2) EARNED INCOME- For purposes of paragraph (1)--

        ‘(A) IN GENERAL- The term ‘earned income’ means income which is earned income within the meaning of section 401(c)(2)(C) or 911(d)(2) (determined without regard to the

phrase ‘not in excess of 30 percent of his share of the net profits of such trade or business’ in subparagraph (B) thereof).

        ‘(B) EXCEPTION- Such term shall not include any amount--

          ‘(i) not includible in gross income,

          ‘(ii) received as a pension or annuity,

          ‘(iii) paid or distributed out of an individual retirement plan (within the meaning of section 7701(a)(37)),

          ‘(iv) received as deferred compensation, or

          ‘(v) received for services performed by an individual in the employ of his spouse (within the meaning of section 3121(b)(3)(B)).

    ‘(e) AMOUNT OF CREDIT TO BE DETERMINED UNDER TABLES-

      ‘(1) IN GENERAL- The amount of the credit allowed by this section shall be determined under tables prescribed by the Secretary.

      ‘(2) REQUIREMENTS FOR TABLES- The tables prescribed under paragraph (1) shall reflect the provisions of subsection (c) and shall round to the nearest $25 any amount of credit which is less than the maximum credit under subsection (b)(1).’

    (b) CLERICAL AMENDMENT- The table of sections for subpart A of part IV of subchapter A of chapter 1 of such Code is amended by inserting after the item relating to section 24 the following new item:

‘Sec. 24A. Credit to reduce marriage penalty.’

    (c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 1996.

TITLE III--PHASE-OUT OF ESTATE AND GIFT TAXES

SEC. 301. PHASE-OUT OF ESTATE AND GIFT TAXES THROUGH INCREASE IN UNIFIED ESTATE AND GIFT TAX CREDIT.

    (a) Estate Tax Credit-

      (1) IN GENERAL- Section 2010(a) of the Internal Revenue Code of 1986 (relating to unified credit against estate tax) is amended by striking ‘$192,800’ and inserting ‘the applicable credit amount’.

      (2) APPLICABLE CREDIT AMOUNT- Section 2010 of such Code is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following:

    ‘(c) APPLICABLE CREDIT AMOUNT- For purposes of this section, the applicable credit amount is the amount of the tentative tax which would be determined under the rate schedule set forth in section 2001(c) if the amount with respect to which such tentative tax is to be computed were the applicable exclusion amount determined in accordance with the following table:

‘In the case of estates of decedents

--The applicable

dying, and gifts made, during:

--exclusion amount is:

1998

--$1,000,000

1999

--$1,500,000

2000

--$2,000,000

2001

--$2,500,000

2002

--$5,000,000.’.

      (3) CONFORMING AMENDMENTS-

        (A) Section 6018(a)(1) of such Code is amended by striking ‘$600,000’ and inserting ‘the applicable exclusion amount in effect under section 2010(c) for the calendar year which includes the date of death’.

        (B) Section 2001(c)(2) of such Code is amended by striking ‘$21,040,000’ and inserting ‘the amount at which the average tax rate under this section is 55 percent’.

        (C) Section 2102(c)(3)(A) of such Code is amended by striking ‘$192,800’ and inserting ‘the applicable credit amount in effect under section 2010(c) for the calendar year which includes the date of death’.

    (b) UNIFIED GIFT TAX CREDIT- Section 2505(a)(1) of the Internal Revenue Code of 1986 (relating to unified credit against gift tax) is amended by striking ‘$192,800’ and inserting ‘the applicable credit amount in effect under section 2010(c) for such calendar year’.

    (c) EFFECTIVE DATE- The amendments made by this section shall apply to the estates of decedents dying, and gifts made, after December 31, 1997.

SEC. 302. REPEAL OF FEDERAL TRANSFER TAXES.

    (a) IN GENERAL- Subtitle B of the Internal Revenue Code of 1986 is repealed.

    (b) EFFECTIVE DATE- The repeal made by subsection (a) shall apply to the estates of decedents dying, and gifts and generation-skipping transfers made, after December 31, 2002.

    (c) TECHNICAL AND CONFORMING CHANGES- The Secretary of the Treasury or the Secretary’s delegate shall not later than 90 days after the effective date of this section, submit to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate a draft of any technical and conforming changes in the Internal Revenue Code of 1986 which are necessary to reflect throughout such Code the changes in the substantive provisions of law made by this Act.