1 The attachment also contains a description of the proposed changes that was prepared by the Joint
Committee on Taxation.
2 See Institute Memorandum to Tax Members No. 27-97, Accounting/Treasurers Members No. 31-97,
Operations Members No. 13-97, International Members No. 12-97, Closed-End Investment Company
Members No. 23-97, Unit Investment Trust Members No. 28-97 and Transfer Agent Advisory Committee
No. 36-97, dated August 1, 1997.
3 See Institute Memorandum to Tax Committee No. 35-97, Accounting/Treasurers Committee No. 39-97,
Operations Committee No. 35-97, Transfer Agent Advisory Committee No. 54-97 and Broker/Dealer
Advisory Committee No. 15-97, dated October 8, 1997.
[9324]
October 10, 1997
TO: TAX MEMBERS No. 37-97
ACCOUNTING/TREASURERS MEMBERS No. 40-97
OPERATIONS MEMBERS No. 22-97
CLOSED-END INVESTMENT COMPANY MEMBERS No. 29-97
UNIT INVESTMENT TRUST MEMBERS No. 40-97
TRANSFER AGENT ADVISORY COMMITTEE No. 56-97
RE: TECHNICAL CORRECTIONS TO CAPITAL GAINS RULES
______________________________________________________________________________
The House Ways and Means Committee has approved for consideration by the House
of Representatives the "Tax Technical Corrections Act of 1997," which is cosponsored by the
Committee’s senior Republican and Democrat (Chairman Archer and Representative Rangel)
and supported by the Treasury Department. Among other things, the technical corrections bill
would substitute the attached revised version of Internal Revenue Code section 1(h)1 for the
version originally included in the Taxpayer Relief Act of 1997,2 thereby modifying the capital
gains rules in several ways.
While there can be no assurances that this bill will be enacted during 1997, the strong
bipartisan support that it has received and the retroactive impact it would have on the law may
lead the Internal Revenue Service ("IRS") to administer the tax laws for 1997 as if this technical
corrections legislation applies. For example, the draft version of the Schedule D (used by
individuals to report capital gains and losses) that IRS has submitted for approval by the Office
of Management and Budget ("OMB") reflects the proposed changes.3
Under the technical corrections bill, all gains and losses on assets taxed at a maximum
tax rate of 28 percent would be combined into a new category of gain called "28 percent rate
gain," which would be defined in revised section 1(h)(5). The present-law definitions of "mid-
term gain and loss" and "pre-effective date gain and loss" would be eliminated. Another effect
of this new 28 percent rate gain category would be to net all gains and losses on assets taxed at
a 28 percent rate first; under the original Act, a net mid-term loss offsets gain taxed at a 20
percent maximum rate before it offsets collectibles gain taxed at a 28 percent maximum rate.
Under an additional modification made by technical corrections, all losses on
collectibles held for more than one year would be treated as "collectibles losses" and netted
against collectibles gain; under the original Act, which contains no special rules for collectibles
losses, any loss on a collectible held for more than 18 months is treated as a more-than-18-
month loss that offsets gain on non-collectibles held for more than 18 months before it offsets
gain on other collectibles.
The rules for netting gains and losses also would be modified in other ways. First, any
net short-term loss for a taxable year would offset 28 percent rate gain first; under the original
Act, net short-term loss first offsets gain taxed at a 20 percent maximum rate. Second, any long-
term capital loss carryover would be treated as 28 percent rate loss that first offsets any 28
percent rate gain. Third, any net loss in the 28 percent rate gain basket would offset gain taxed
at the 25 percent maximum rate (called "unrecaptured section 1250 gain") before offsetting gain
taxed at the 20 percent maximum rate; under the original Act, 28 percent rate losses offset gains
taxed at a maximum rate of 28 percent before they offset gains taxed at a maximum rate of 25
percent.
Technical corrections also would make other changes. First, the bill would clarify that
any gain or loss on a section 1256 contract would be treated as gain or loss from property held
for more than 18 months. Inherited property would be deemed under the bill to have a holding
period of more than 18 months. Finally, conforming changes to the holding period rules of
section 1233 (relating to short sales) and section 1092(f) (relating to qualified covered calls)
would be made to cover situations in which assets were held for more than a year but not more
than 18 months.
Keith D. Lawson
Associate Counsel - Tax
Attachment (in .pdf format)
Note: Not all recipients of this memo will receive an attachment. If you wish to obtain a copy
of the attachment referred to in this memo, please call the Institute’s Library Services Division
at (202)326-8304, and ask for this memo’s attachment number: 9324.