H.R. 3170 (105th): To amend the Internal Revenue Code of 1986 to prevent the conversion of ordinary income or short-term ...

...capital gain into income eligible for the long-term capital gain rates, and for other purposes.

105th Congress, 1997–1998. Text as of Feb 05, 1998 (Introduced).

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HR 3170 IH

105th CONGRESS

2d Session

H. R. 3170

To amend the Internal Revenue Code of 1986 to prevent the conversion of ordinary income or short-term capital gain into income eligible for the long-term capital gain rates, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

February 5, 1998

Mrs. KENNELLY of Connecticut 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 prevent the conversion of ordinary income or short-term capital gain into income eligible for the long-term capital gain rates, 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. CAPITAL GAIN TREATMENT OF GAIN FROM CONSTRUCTIVE OWNERSHIP TRANSACTIONS.

    (a) IN GENERAL- Part IV of subchapter P of chapter 1 of the Internal Revenue Code of 1986 (relating to special rules for determining capital gains and losses) is amended by inserting after section 1259 the following new section:

‘SEC. 1260. GAINS FROM CONSTRUCTIVE OWNERSHIP TRANSACTIONS.

    ‘(a) IN GENERAL- If the taxpayer has gain from a constructive ownership transaction with respect to any financial position and such gain would (without regard to this section) be treated as a long-term capital gain--

      ‘(1) such gain shall be treated as short-term capital gain to the extent that such gain exceeds the net underlying long-term capital gain, and

      ‘(2) to the extent such gain is treated as a long-term capital gain after the application of paragraph (1), the determination of the capital gain rate (or rates) applicable to such gain under section 1(h) shall be determined on the basis of the respective rate (or rates) that would have been applicable to the net underlying long-term capital gain.

    ‘(b) INTEREST CHARGE ON DEFERRAL OF GAIN RECOGNITION-

      ‘(1) IN GENERAL- If any gain is treated as short-term capital gain for any taxable year by reason of subsection (a)(1), the taxpayer’s tax imposed by this chapter for such taxable year shall be increased by the amount of interest which would have been imposed under section 6601--

        ‘(A) for periods ending on the due date (without extensions) for the return of tax imposed by this chapter for such taxable year, and

        ‘(B) on underpayments of tax for prior taxable years which would have resulted had such gain been included in gross income ratably during the period the constructive ownership transaction was open.

      Any amount payable under this paragraph shall be taken into account in computing the amount of any deduction allowable to the taxpayer for interest paid or accrued during such taxable year.

      ‘(2) NO CREDITS AGAINST INCREASE IN TAX- Any increase in tax under paragraph (1) shall not be treated as tax imposed by this chapter for purposes of determining--

        ‘(A) the amount of any credit allowable under subpart A, B, D, or G of part IV of subchapter A of chapter 1, or

        ‘(B) the amount of the tax imposed by section 55.

    ‘(c) FINANCIAL POSITION- For purposes of this section--

      ‘(1) IN GENERAL- The term ‘financial position’ means any position with respect to any stock, debt instrument, partnership interest, or investment trust interest.

      ‘(2) POSITION- The term ‘position’ means an interest, including a futures or forward contract, short sale, or option.

    ‘(d) CONSTRUCTIVE OWNERSHIP TRANSACTION-

      ‘(1) IN GENERAL- The taxpayer shall be treated as having entered into a constructive ownership transaction with respect to any financial position if the taxpayer (or a related person)--

        ‘(A) holds a long position under a notional principal contract with respect to the same or substantially identical property,

        ‘(B) enters into a forward or futures contract to acquire the same or substantially identical property,

        ‘(C) is the grantor of a put, and is the holder of a call, with respect to the same or substantially identical property and such options have substantially equal strike prices, or

        ‘(D) enters into 1 or more other transactions (or acquires 1 or more positions) that have substantially the same effect as a transaction described in any of the preceding subparagraphs.

      ‘(2) EXCEPTION FOR POSITIONS WHICH ARE MARKED TO MARKET- This section shall not apply to any constructive ownership transaction if all of the positions which are part of such transaction are marked to market under any provision of this title or the regulations thereunder.

      ‘(3) LONG POSITION- A person shall be treated as holding a long position under a notional principal contract with respect to any property if such person--

        ‘(A) has the right to be paid (or receive credit for) all or substantially all of the investment yield (including appreciation) on such property for a specified period, and

        ‘(B) is obligated to reimburse (or provide credit) for all or substantially all of any decline in the value of such property.

      ‘(4) FORWARD CONTRACT- The term ‘forward contract’ has the meaning given to such term by section 1259(d)(1).

      ‘(5) RELATED PERSON- The term ‘related person’ has the meaning given to such term by section 1259(c)(4).

    ‘(e) NET UNDERLYING LONG-TERM CAPITAL GAIN- For purposes of this section, in the case of any constructive ownership transaction with respect to any financial position, the term ‘net underlying long-term capital gain’ means the aggregate net capital gain that the taxpayer would have had if--

      ‘(1) such position had been acquired on the date such transaction was opened and sold on the date such transaction was closed, and

      ‘(2) only gains and losses that would have resulted from the deemed ownership under paragraph (1) were taken into account.

    The amount of the net underlying long-term capital gain with respect to any financial position shall be treated as zero unless the amount thereof is established by clear and convincing evidence.

    ‘(f) EXCEPTION IF MARK TO MARKET ELECTED-

      ‘(1) IN GENERAL- In the case of a taxpayer who elects to have this subsection apply--

        ‘(A) subsections (a) and (b) shall not apply,

        ‘(B) such taxpayer shall recognize gain or loss on any constructive ownership transaction which is open as of the close of any taxable year as if the financial position to which such transaction relates were sold for its fair market value on the last business day of such taxable year, and

        ‘(C) any gain or loss shall be taken into account for such taxable year.

      Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence.

      ‘(2) CHARACTER OF GAIN OR LOSS-

        ‘(A) IN GENERAL- Any gain or loss with respect to a constructive ownership transaction under paragraph (1) shall be treated as ordinary income or loss.

        ‘(B) SPECIAL RULE FOR DISPOSITIONS- If--

          ‘(i) gain or loss is recognized with respect to a constructive ownership transaction before the close of the taxable year, and

          ‘(ii) paragraph (1) would have applied if the transaction were open as of the close of the taxable year,

        such gain or loss shall be treated as ordinary income or loss.

      ‘(3) ELECTION- An election under paragraph (1) may be made without the consent of the Secretary. Such an election, once made, shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.

    ‘(g) 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 IV of subchapter P of chapter 1 of such Code is amended by adding at the end the following new item:

‘Sec. 1260. Gains from constructive ownership transactions.’.

    (c) EFFECTIVE DATE- The amendments made by this section shall apply to gain recognized after the date of the enactment of this Act.