article: SECTION 1. INDEXING OF CERTAIN ASSETS 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 1021 the following new section: ``SEC. 1022. INDEXING OF CERTAIN ASSETS 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 an individual of an indexed asset which has been held for more than 1 year, the indexed basis of the asset shall be substituted for its adjusted basis. ``(2) Special rule for recapture gain.-- ``(A) In general.--Paragraph (1) shall not apply for purposes of determining the amount of recapture gain on the sale or other disposition of an indexed asset, but the amount of any such recapture gain shall increase the adjusted basis of the asset for purposes of applying paragraph (1) to determine the amount of other gain on such sale or other disposition. ``(B) Recapture gain.--For purposes of subparagraph (A), the term `recapture gain' means any gain treated as ordinary income under section 1245 or 1254 or which would be treated as ordinary income under section 1250 if such section applied to all depreciation adjustments instead of only additional depreciation. ``(b) Indexed Asset.-- ``(1) In general.--For purposes of this section, the term `indexed asset' means-- ``(A) any stock in a corporation, and ``(B) any tangible property (or any interest therein), which is a capital asset or property used in the trade or business (as defined in section 1231(b)). ``(2) Certain property excluded.--For purposes of this section, the term `indexed asset' does not include-- ``(A) Creditor's interest.--Any interest in property which is in the nature of a creditor's interest. ``(B) Collectibles.--Any collectible (as defined in section 408(m)(2) without regard to section 408(m)(3)). ``(C) Options.--Any option or other right to acquire an interest in property. ``(D) Net lease property.--In the case of a lessor, net lease property (within the meaning of subsection (i)(3)). ``(E) Certain preferred stock.--Stock which is fixed and preferred as to dividends and does not participate in corporate growth to any significant extent. ``(F) Stock in foreign corporations.--Stock in a foreign corporation. ``(G) Stock in s corporations.--Stock in an S corporation. ``(3) Exception for stock in foreign corporation which is regularly traded on national or regional exchange.--Paragraph (2)(F) shall not apply to stock in a foreign corporation the stock of which is listed on the New York Stock Exchange, the American Stock Exchange, or any domestic regional exchange for which quotations are published on a regular basis or is authorized for trading on the national market system operated by the National Association of Securities Dealers other than-- ``(A) stock of a foreign investment company (within the meaning of section 1246(b)), ``(B) stock in a passive foreign investment company (as defined in section 1296), and ``(C) stock in a foreign corporation held by a United States person who meets the requirements of section 1248(a)(2). ``(c) Indexed Basis.--For purposes of this section-- ``(1) Indexed basis.--The indexed basis for any asset is-- ``(A) the adjusted basis of the asset, multiplied by ``(B) the applicable inflation ratio. ``(2) Applicable inflation ratio.--The applicable inflation ratio for any asset shall be determined by dividing-- ``(A) the CPI for the calendar year preceding the calendar year in which the disposition takes place, by ``(B) the CPI for the calendar year preceding the calendar year in which the taxpayer's holding period for such asset began (or, if later, for calendar year 1992). The applicable inflation ratio shall not be taken into account unless it is greater than 1. The applicable inflation ratio for any asset shall be rounded to the nearest one-hundredth. ``(3) Conventions.--For purposes of paragraph (2), if any asset is disposed of during any calendar year-- ``(A) such disposition shall be treated as occurring on the last day of such calendar year, and ``(B) the taxpayer's holding period for such asset shall be treated as beginning in the same calendar year as would be determined for an asset actually disposed of on such last day with a holding period of the same length as the actual holding period of the asset involved. ``(4) CPI.--For purposes of this subsection, the CPI for any calendar year shall be determined under section 1(f)(4). ``(d) Short Sales.-- ``(1) In general.--In the case of a short sale of an indexed asset with a short sale period in excess of 1 year, for purposes of this title, the amount realized shall be an amount equal to the amount realized (determined without regard to this paragraph) multiplied by the applicable inflation ratio. 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 on which the holding period for the asset begins and the closing date for the sale shall be treated as the date of disposition. ``(2) Short sale of substantially identical property.--If the taxpayer or the taxpayer's spouse sells short property substantially identical to an asset held by the taxpayer, the asset held by the taxpayer and the substantially identical property shall not be treated as indexed assets for the short sale period. ``(3) Short sale period.--For purposes of this subsection, the short sale period begins on the day after 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) In general.--Stock in a qualified investment entity shall be an indexed asset for any calendar month in the same ratio as the fair market value of the assets held by such entity at the close of such month which are indexed assets 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). ``(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 (but only for purposes of determining the income of partners who are individuals). ``(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 (but only for purposes of determining the income of participants who are individuals). ``(g) Dispositions Between Related Persons.--This section shall not apply to any sale or other disposition of property between related persons (within the meaning of section 465(b)(3)(C)) if such property, in the hands of the transferee, is of a character subject to the allowance for depreciation provided in section 167. ``(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 as separate asset.--In the case of any asset, the following shall be treated as a separate asset: ``(A) A substantial improvement to property. ``(B) In the case of stock of a corporation, a substantial contribution to capital. ``(C) 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) Net lease property defined.--The term `net lease property' means leased property where-- ``(A) the term of the lease (taking into account options to renew) was 50 percent or more of the useful life of the property, and ``(B) for the period of the lease, the sum of the deductions with respect to such property which are allowable to the lessor solely by reason of section 162 (other than rents and reimbursed amounts with respect to such property) is 15 percent or less of the rental income produced by such property. ``(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 1991 for purposes of determining gain.'' (c) Effective Date.--The amendments made by this section shall apply to dispositions of any property after the date of the enactment of this Act.
summary: Amends the Internal Revenue Code to require indexing, based on the consumer price index, of the adjusted basis of certain assets (corporate stock and tangible property that is a capital asset of property used in a trade or business) that have been held for more than one year at the time of sale or other transfer, solely for the purpose of determining gain or loss.