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for the 26th year, the fundholder would be treated as having withdrawn 20 percent; for the 27th year, 40 percent; for the 28th year, 60 percent; for the 29th year, 80 percent, and for the 30th year, 100 percent. For purposes of this rule, if a taxpayer commits an amount to the construction or acquisition of identified vessels pursuant to a binding contract entered into before the close of a taxable year, the amount so committed is not treated as remaining in the fund.
The provision is effective for taxable years beginning after December 31, 1986.
The provision is estimated to increase fiscal year budget receipts by $3 million in 1987, $5 million in 1988, $4 million in 1989, $4 million in 1990, and $4 million in 1991.
TITLE III-CAPITAL GAINS AND LOSSES
A. Individual Capital Gains and Losses (Secs. 301 and 302 of the
Individual and other noncorporate taxpayers could deduct from gross income 60 percent of the amount of any net capital gain for the taxable year, i.e., 60 percent of the excess of net long-term capital gain over net short-term capital loss. As a result, the highest tax rate applicable to a noncorporate taxpayer's net capital gain was 20 percent (the 50 percent maximum individual tax rate times the 40 percent of net capital gain included in adjusted gross income).
Capital losses of individuals were deductible in full against capital gains. In addition, a maximum of $3,000 of capital losses was deductible against ordinary income. However, only 50 percent of net long-term capital losses in excess of net short-term capital gains could be deducted from ordinary income. Excess losses could be carried forward to future years.
Reasons for Change
The Congress believed that as a result of the Act's reduction of individual tax rates on such forms of capital income as business profits, interest, dividends, and short-term capital gains, the need to provide a reduced rate for net capital gain is eliminated. This will result in a tremendous amount of simplification for many taxpayers since their tax will no longer depend upon the characterization of income as ordinary or capital gain. In addition, this will eliminate any requirement that capital assets be held by the taxpayer for any extended period of time in order to obtain favorable treatment. This will result in greater willingness to invest in assets that are freely traded (e.g., stocks) and make investment decisions more neutral.
The Congress believed that the top rate on individual capital gains should not exceed the maximum rates set forth in the Act, and therefore the Act provides that the maximum tax rate on capital gains will not exceed the top individual rate that the Act provides in the event that the top individual rate is increased by a subsequent public law (unless that law specifically increases the capital gains tax).
1 For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 241; H.Rep. 99-426, pp. 196-197; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 401 and 402; S.Rep. 99313, pp. 169-170; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 105-106 (Conference Report). (178)
Explanation of Provision
The Act repeals the net capital gain deduction for individuals.2 The Act also provides that the tax imposed by section 1 on an individual, estate, or trust cannot exceed the sum of (1) a tax computed at the rates under section 1 on the greater of (a) the taxpayer's taxable income reduced by the amount of net capital gain or (b) the amount of the taxpayer's taxable income which is taxed at a rate below 28 percent; (2) a tax of 28 percent on the amount of the taxpayer's taxable income in excess of the amount determined under (1) above; and (3) any additional tax resulting from the gradual phaseout of the benefits of the 15 percent bracket and the personal exemptions. If for any taxable year beginning after 1987, the highest individual rates (under the tax rate schedules set forth in subsections (a), (b), (c), (d) or (e) of section 1) do not exceed 28 percent, then this limitation will have no application.
The maximum rate on long-term capital gain in 1987 is 28 percent.
Capital losses are allowed in full against capital gain as under prior law. Capital losses are also allowed against up to $3,000 of ordinary income and the excess of net long-term capital loss over net short-term capital gain is allowed in full for this purpose. As under prior law, capital losses may be carried forward.
The prior statutory structure for capital gains is retained in the Code to facilitate reinstatement of a long-term capital gains rate differential if there is a future tax rate increase.
This provision applies to taxable years beginning after December 31, 1986, regardless of whether the sale or other transaction giving rise to the gain occurred in a prior year. Thus, if long-term capital gain is properly taken into income under the taxpayer's method of accounting in taxable years beginning after December 31, 1986, it is subject to the repeal of the net capital gain deduction. For example, the repeal of the net capital gain deduction applies to longterm capital gains recognized on the installment method in taxable years beginning after December 31, 1986, without regard to when the sale was made. Gains recognized in taxable years beginning after December 31, 1986, with respect to installment sales made before January 1, 1987, are thus subject to the new provisions.
2 The Act includes a conforming amendment to Code section 170(e)(1)(B), relating to certain charitable contributions of property. Under prior law, the deduction for contributions by individuals of unrelated-use tangible personal property, or of any appreciated property donated to certain private nonoperating (grant-making) foundations, essentially was limited to the donor's basis in the property plus the excludable amount of any long-term capital gain which would have been realized if the property had been sold. (The deductible amount for such contributions by corporations also is limited.) In conformity to the repeal of the capital gains exclusion for individuals, the Act essentially limits the deductible amount of such contributions by individuals to the donor's basis in the property. (A related change is made to the deductible amount of such contributions by corporations.) No change is made to the reduction rule in section 170 (eX1XA) for contributions of ordinary-income property or to the exception to the reduction rule in section 170(e)(5) for contributions of qualified appreciated stock to certain private foundations. Under the Act (as under prior law), the amount of charitable deduction allowable to an itemizer for a donation of stock to a public charity equals (for regular tax purposes) the full fair market value of the stock at the time of the donation if the donor has held the stock for the long-term capital gain holding period, or the donor's basis in the stock if the donor has not held the stock for the long-term capital gain holding period (Code section 170(e)).
In the case of a pass-through entity that is not itself liable for tax, the provision applies to gain properly taken into account by the partner or other taxable beneficial owner in such person's taxable years beginning after December 31, 1986. For example, in the case of a calendar year individual partner in a partnership that has a fiscal year ending January 31, 1987, the repeal of the net capital gain deduction would apply to such partner's share of gain resulting from a cash sale by the partnership during the partnership's fiscal year ending January 31, 1987, regardless of whether the sale occurred prior to, or on or after, January 1, 1987. Similarly, the new provision would apply to such partner's share of any gain properly taken into account by the partnership on the installment method during the partnership's fiscal year ending January 31, 1987, regardless of whether the installment sale occurred in an earlier partnership fiscal year.
Long-term capital loss properly taken into account in taxable years beginning after December 31, 1986 is likewise subject to the new provisions. For example, in the case of a calendar year individual taxpayer with no capital gain properly taken into account in 1987, a long-term capital loss carryover from an earlier taxable year is allowed in full as an offset to 1987 ordinary income, up to the $3,000 limit.
The revenue effect of this provision is included with the revenue effect for individual rate changes (title I, Part A).
B. Corporate Capital Gains (Sec. 311 of the Act and sec. 1201 of
An alternative tax rate of 28 percent applied to a corporation's net capital gain (the excess of net long-term capital gain over net short-term capital loss) if the tax computed using that rate was lower than the corporation's regular tax (sec. 1201). Corporate capital losses were deductible only against capital gain. Capital losses generally could be carried back 3 years and forward 5 years.
Reasons for Change
Under prior law, large corporations obtained preferential treatment of capital gains income (28 percent alternative rate compared to 46 percent regular rate). The Congress was of the view that corporate capital gain should not be taxed at preferential rates, in light of the overall reduction in rates. Thus, the Act taxes corporate capital gains at the regular corporate tax rates.
Explanation of Provision
The Act makes the alternative tax inapplicable to taxable years for which the new corporate tax rates are fully effective (i.e., taxable years beginning on or after July 1, 1987). Thus, corporate net capital gain for such years is taxed at regular corporate rates (i.e., generally a maximum 34 percent under the Act). In the event that the maximum rate under Code section 11 is increased by a subsequent public law, the Act provides that a 34% alternative rate will be applicable unless such law changes that rate.
For taxable years which include periods prior to the time the new rates are fully effective, the alternative tax rate on gain properly taken into account under the taxpayer's method of accounting after December 31, 1986 is 34 percent. The Act provides that for any taxable year beginning on or after January 1, 1987, and before July 1, 1987, the alternate rate applicable to the net capital gain will be 34 percent. For taxable years beginning in 1986 and ending in 1987, a 28 percent rate will apply to the lesser of: (1) the net capital gain for the taxable year or (2) the net capital gain that is included in income under the taxpayer's method of accounting before January 1, 1987; any remaining net capital gain will be taxed at 34 percent.
The Act does not change the capital loss provisions.
3 For legislative background of the provision, see: H.R. 3838 as reported by the House Committee on Ways and Means on December 7, 1985, secs. 301 and 302; H.Rep. 99-426, pp. 231-233; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 106-107 (Conference Report).