HR 159 IH

To amend the Internal Revenue Code of 1986 to lower the maximum capital gains rate to 15 percent with respect to assets held for more than 3 years, to replace the estate and gift tax rate schedules, and for other purposes.

January 6, 1999

Mr. HILL of Montana (for himself, Mr. TALENT, Mrs. CHENOWETH, and Mr. SCHAFFER) introduced the following bill; which was referred to the Committee on Ways and Means

To amend the Internal Revenue Code of 1986 to lower the maximum capital gains rate to 15 percent with respect to assets held for more than 3 years, to replace the estate and gift tax rate schedules, 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 `American Dream Tax Fairness Equity Act of 1997'.

SEC. 2. REDUCTION OF MAXIMUM CAPITAL GAINS RATE FOR INDIVIDUALS TO 15 PERCENT WITH RESPECT TO ASSETS HELD FOR MORE THAN 3 YEARS.

(a) IN GENERAL- Subsection (h) of section 1 of the Internal Revenue Code of 1986 (relating to tax imposed) is amended to read as follows:

`(h) MAXIMUM CAPITAL GAINS RATE-

`(1) IN GENERAL- If a taxpayer has a net capital gain for any taxable year, then the tax imposed by this section shall not exceed the sum of--

`(A) a tax computed at the rates and in the same manner as if this subsection had not been enacted on the greater of--

`(i) taxable income reduced by the amount of the net capital gain, or

`(ii) the amount of taxable income taxed at a rate below 28 percent,

`(B) 15 percent of qualified 3-year capital gain (to the extent not taken into account under subparagraph (A)), and

`(C) 28 percent of the excess (if any) of taxable income over the amounts taken into account under subparagraphs (A) and (B).

`(2) QUALIFIED 3-YEAR CAPITAL GAIN- For purposes of this subsection, the term `qualified 3-year capital gain' means the lesser of--

`(A) net long-term capital gain for the taxable year, determined by substituting `held for more than 3 years' for `held for more than 1 year' in paragraphs (3) and (4) of section 1222, or

`(B) net capital gain for such taxable year.

`(3) COORDINATION WITH INVESTMENT INCOME ELECTION- For purposes of this subsection, the net capital gain for any taxable year shall be reduced (but not below zero) by the amount which the taxpayer elects to take into account as investment income for the taxable year under section 163(d)(4)(B)(iii).'

(b) EFFECTIVE DATE- The amendment made by this section shall apply to taxable years beginning after December 31, 1997.

SEC. 2. REPLACEMENT OF ESTATE AND GIFT TAX RATE SCHEDULES.

(a) ESTATE TAX RATE SCHEDULE REPLACED BY 15 AND 28 PERCENT TAX RATES-

(1) IN GENERAL- Subsection (b) of section 2001 of the Internal Revenue Code of 1986 (relating to imposition and rate of tax) is amended to read as follows:

`(b) COMPUTATION OF TAX- The amount imposed by this section shall be--

`(1) 15 percent of all qualified 3-year capital gain (within the meaning of section 1(h)) included in the taxable estate, and

`(2) 28 percent of all capital gain (other than such qualified 3-year capital gain) included in the taxable estate,

determined as if all property included in the taxable estate had been sold for its fair market value on the date of the decedent's death (or the date applicable with respect to the valuation of such property under section 2032, if any).'

(2) REPEAL OF RATE SCHEDULE- Section 2001 of such Code is amended by striking subsection (c).

(3) CONFORMING AMENDMENTS- Section 2001 of such Code is amended by striking subsections (d) and (e).

(b) REDUCTION OF GIFT TAX- Subsection (a) of section 2502 of such Code is amended to read as follows:

`(a) COMPUTATION OF TAX- The tax imposed by section 2501 for each calendar year shall be--

`(1) 15 percent of all qualified 3-year capital gain (as defined in section 1(h)) contained in the taxable gifts made during such year, and

`(2) 28 percent of all capital gain (other than such qualified 3-year capital gain) contained in such taxable gifts,

determined, with respect to each such gift, as if all property contained in such gift had been sold by the grantor for its fair market value on the date of such gift.'

(c) UNIFIED CREDIT AGAINST ESTATE AND GIFT TAXES-

(1) UNIFIED CREDIT AGAINST ESTATE TAX- Subsection (a) of section 2010 of such Code (relating to unified credit against estate tax) is amended to read as follows:

`(a) ALLOWANCE OF CREDIT-

`(1) GENERAL RULE- A credit of the amount determined under paragraph (2) shall be allowed to the estate of every decedent against the tax imposed by section 2001.

`(2) AMOUNT OF CREDIT- The amount determined under this paragraph is the amount equal to the sum of--

`(A) the tax imposed under section 2001(b)(2) (to the extent that such tax is imposed on so much of the imputed capital gains amount as does not exceed $600,000), and

`(B) the tax imposed under section 2001(b)(1) on the excess (if any) of--

`(i) so much of the imputed capital gains amount as does not exceed $600,000, over

`(ii) the portion of the imputed capital gains amount taken into account under subparagraph (A).

`(3) IMPUTED CAPITAL GAINS AMOUNT- For purposes of this subsection, the term `imputed capital gains amount' means the aggregate amount to which the rates of section 2001(b) apply.

`(4) COORDINATION WITH UNIFIED CREDIT USED TO REDUCE GIFT TAX-

`(A) IN GENERAL- The $600,000 amounts referred to in subparagraphs (A) and (B)(i) of paragraph (2) shall each be reduced by the cumulative gift tax credit amount.

`(B) CUMULATIVE GIFT TAX CREDIT AMOUNT- For purposes of this paragraph, the term `cumulative gift tax credit amount' means the sum of the capital gains gift amounts (as defined in section 2505(a)(3)) with respect to which a credit was allowed under section 2505 (relating to unified credit against gift tax), determined by not taking into account any gift included in the taxable estate.'

(2) UNIFIED CREDIT AGAINST GIFT TAX- Subsection (a) of section 2505 of such Code (relating to unified credit against gift tax) is amended to read as follows:-

`(a) ALLOWANCE OF CREDIT-

`(1) GENERAL RULE- In the case of a citizen or resident of the United States, there shall be allowed as a credit against the tax imposed by section 2501 for each calendar year an amount equal to--

`(A) the amount determined under paragraph (2), reduced by--

`(B) the sum of the amounts allowable as a credit to the individual under this section for all preceding calendar periods with respect to gifts made before the gift tax change date, as determined under paragraph (4).

`(2) AMOUNT- The amount determined under this paragraph is the amount equal to the sum of--

`(A) the tax imposed under section 2502(a)(2) for the year on the capital gains gift amount, and

`(B) the tax imposed under section 2502(a)(1) for the year on the excess (if any) of--

`(i) the capital gains gift amount for the year, over

`(ii) the portion of such capital gains gift amount taken into account under subparagraph (A).

`(3) CAPITAL GAINS GIFT AMOUNT- For purposes of this subsection, the term `capital gains gift amount' means, for any year, the amount to which the rates of section 2502(b) apply with respect to such year, but not more than the excess (if any) of--

`(A) $600,000, over

`(B) the sum of the capital gains gift amounts for all preceding years (determined without taking into account any gift made before the date of the enactment of this paragraph).

`(4) GIFTS MADE BEFORE GIFT TAX CHANGE DATE-

`(A) IN GENERAL- For purposes of paragraph (1)(B), the amount allowable as a credit to an individual under this section for a preceding calendar period with respect to any gift made before the gift tax change date shall be the amount which would have been allowable to the individual as a credit under this section with respect to such gift--

`(i) if this section and section 2001(b), as in effect on the day after the date of the enactment of this paragraph, had been in effect for the year of such gift and all preceding calendar periods, and

`(ii) without regard to the parenthetical contained in paragraph (3)(B).

`(B) GIFT MADE BEFORE GIFT TAX CHANGE DATE- For purposes of this section, the term `gift made before gift tax change date' means a gift made before the date of the enactment of this paragraph (other than a gift taken into account under subsection (b)).'

(3) CONFORMING AMENDMENT- Subsection (b) of section 2502 of such Code is amended by adding at the end the following new flush sentence:

`In connection with the gift tax imposed by this chapter for the calendar year in which this sentence is enacted with respect to gifts made on or after the date of such enactment, the term `preceding calendar period' shall include the portion of such calendar year which precedes such date of enactment.'

(d) ESTATES OF NONRESIDENT ALIENS-

(1) RATE CHANGE-

(A) IN GENERAL- Subsection (b) of section 2101 of such Code (relating to tax imposed on estates of nonresident aliens) is amended to read as follows:

`(b) COMPUTATION OF TAX- The tax imposed by this section shall be the amount equal to the tax computed under section 2001(b) (determined as if section 2001 applied to the decedent).'

(B) CONFORMING AMENDMENT- Section 2101 of such Code is amended by striking subsection (c).

(2) CREDITS AGAINST TAX- Section 2102 of such Code (relating to credits against estate tax for nonresidents not citizens) is amended by adding at the end the following new subsection:

`(d) ADJUSTMENT OF AMOUNTS TO REFLECT UNIFIED CREDIT CHANGES- The Secretary shall by regulation adjust the dollar amounts provided in this section to reflect, in a proportionate manner, the changes made to sections 2010 and 2505 on the date of the enactment of this subsection.'

(e) EFFECTIVE DATE- The amendments made by this section shall apply to estates of decedents dying on or after, and gifts made on or after, the date of the enactment of this Act.

SEC. 3. TAX ON TRUSTS WHEN GRANTOR DIES.

(a) IN GENERAL- Subpart A of part I of subchapter J of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new section:

`SEC. 646. ASSETS MARKED TO MARKET WHEN GRANTOR DIES.

`(a) IN GENERAL- For purposes of this title, on the death of any individual who has contributed property to a trust--

`(1) the trust shall recognize gain or loss as if all property so contributed by the decedent which is contained in the trust were sold for its fair market value on the date of such death,

`(2) such gain or loss shall be taken into account for the taxable year of the trust in which such death occurs, and

`(3) proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under paragraph (2).

`(b) PROPERTY CONTRIBUTED BY PARTNERSHIP OR CORPORATION- For purposes of this section, the Secretary may by regulations provide that property contributed to a trust by a partnership or corporation shall be treated as contributed by the individual having a greater than 50 percent interest in such partnership or owning more than 50 percent of the stock of such corporation. For purposes of this subsection, rules similar to the rules of section 318 (relating to constructive ownership of stock) shall apply.

`(c) PROPORTIONATE APPLICATION- If any property was contributed to a trust partially by the decedent and partially by another person, the portion of such property so contributed by the decedent shall be treated as a separate asset for purposes of this title and subsection (a) shall apply to such portion.

`(d) COORDINATION WITH INCLUSION IN TAXABLE ESTATE- This section shall not apply to the portion of any trust which is included in the taxable estate of any individual.'

(b) CLERICAL AMENDMENT- The table of sections for subpart A of part I of subchapter J of chapter 1 of such Code is amended by adding at the end the following new item:

`Sec. 646. Assets marked to market when grantor dies.'

(c) EFFECTIVE DATE-

(1) IN GENERAL- Except as provided in paragraph (2), the amendments made by this section shall apply with respect to decedents dying on or after the date of the enactment of this Act.

(2) TRUSTS CONTAINING PROPERTY CONTRIBUTED BY DECEDENTS DYING BEFORE DATE OF ENACTMENT- For purposes of section 646 of the Internal Revenue Code of 1986 (as added by subsection (b)), any individual dying before the date of the enactment of this Act shall be treated as dying on the date of the enactment of this Act.

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