article: SECTION 1. 100 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, 100 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) Section 1 of such Code is amended by striking subsection (h). (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) The first sentence of paragraph (1) of section 170(e) of such Code is amended by striking ``reduced by the sum of--'' and all that follows and inserting ``reduced by the amount of gain which would not have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of such contribution).'' (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) Paragraph (3) of section 852(b) of such Code is amended by striking subparagraph (A). (B) Subparagraph (D) of section 852(b)(3) of such Code is amended-- (i) in clause (i) by striking ``shall not exceed'' and all that follows and inserting ``shall not exceed that part of the excess (if any) of the net capital gain over the deduction for dividends paid (as defined in section 561 and determined with reference to capital gain dividends only) which he would have received if all of such amount had been distributed as capital gain dividends by the company to the holders of such shares at the close of its taxable year.'', and (ii) by striking clauses (ii), (iii), and (iv) and redesignating clause (v) as clause (ii). (17)(A) Paragraph (2) of section 857(b) of such Code is amended by adding at the end the following new subparagraph: ``(G) There shall be excluded the amount of the net capital gain, if any.'' (B) Paragraph (3) of section 857(b) of such Code is amended by striking subparagraph (A). (C) Subparagraph (C) of section 857(b)(3) of such Code is amended by striking ``the excess described in subparagraph (A)(ii) of this paragraph'' and inserting ``the excess (if any) of the net capital gain over the deduction for dividends paid (as defined in section 561 and determined with reference to capital gain dividends only)''. (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) Section 1202 of such Code is hereby repealed. (22) Subsection (b) of section 1374 of such Code is amended by striking paragraph (4). (23) Subsection (b) of section 1381 of such Code 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 ``the rate specified by the Secretary'', and (B) in paragraph (2) by striking ``35 percent'' and inserting ``the rate specified by the Secretary''. (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 to read as follows: ``No tax shall be imposed under the preceding sentence with respect to the portion of any nonqualified withdrawal made out of the capital gain account.'' (B) The second sentence of section 607(h)(6)(A) of the Merchant Marine Act, 1936, is amended to read as follows: ``No tax shall be imposed under the preceding sentence with respect to the portion of any nonqualified withdrawal made out of the capital gain account.'' (29) 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.'' (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 amendment 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) Withholding.--The amendment made by subsection (c)(25) shall apply only to amounts paid after the date of the enactment of this Act. (5) 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).
summary: Amends the Internal Revenue Code to replace provisions relating to an alternative tax for corporations on capital gains with provisions making 100 percent of the net capital gain of a taxpayer a deduction from gross income. Provides for the treatment of estates and trusts. Requires reducing net capital gain by the amount the taxpayer takes into account as investment income under specified provisions.