text: SECTION 1. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF DETERMINING GAIN 
                OR LOSS.
  
      (a) In General.--Part II of subchapter O of chapter 1 (relating to 
  basis rules of general application) is amended by redesignating section 
  1023 as section 1024 and by inserting after section 1022 the following 
  new section:
  
  ``SEC. 1023. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF DETERMINING 
                GAIN OR LOSS.
  
      ``(a) General Rule.--
              ``(1) Indexed basis substituted for adjusted basis.--Solely 
          for purposes of determining gain or loss on the sale or other 
          disposition by a taxpayer (other than a corporation) of an 
          indexed asset which has been held for more than 3 years, the 
          indexed basis of the asset shall be substituted for its 
          adjusted basis.
              ``(2) Exception for depreciation, etc.--The deductions for 
          depreciation, depletion, and amortization shall be determined 
          without regard to the application of paragraph (1) to the 
          taxpayer or any other person.
      ``(b) Indexed Asset.--
              ``(1) In general.--For purposes of this section, the term 
          `indexed asset' means--
                      ``(A) common stock in a C corporation (other than a 
                  foreign corporation), and
                      ``(B) tangible property,
          which is a capital asset or property used in the trade or 
          business (as defined in section 1231(b)).
              ``(2) Stock in certain foreign corporations included.--For 
          purposes of this section--
                      ``(A) In general.--The term `indexed asset' 
                  includes common stock in a foreign corporation which is 
                  regularly traded on an established securities market.
                      ``(B) Exception.--Subparagraph (A) shall not apply 
                  to--
                              ``(i) stock of a foreign investment 
                          company,
                              ``(ii) stock in a passive foreign 
                          investment company (as defined in section 
                          1296),
                              ``(iii) stock in a foreign corporation held 
                          by a United States person who meets the 
                          requirements of section 1248(a)(2), and
                              ``(iv) stock in a foreign personal holding 
                          company.
                      ``(C) Treatment of american depository receipts.--
                  An American depository receipt for common stock in a 
                  foreign corporation shall be treated as common stock in 
                  such corporation.
      ``(c) Indexed Basis.--For purposes of this section--
              ``(1) General rule.--The indexed basis for any asset is--
                      ``(A) the adjusted basis of the asset, increased by
                      ``(B) the applicable inflation adjustment.
              ``(2) Applicable inflation adjustment.--The applicable 
          inflation adjustment for any asset is an amount equal to--
                      ``(A) the adjusted basis of the asset, multiplied 
                  by
                      ``(B) the percentage (if any) by which--
                              ``(i) the gross domestic product deflator 
                          for the last calendar quarter ending before the 
                          asset is disposed of, exceeds
                              ``(ii) the gross domestic product deflator 
                          for the last calendar quarter ending before the 
                          asset was acquired by the taxpayer.
          The percentage under subparagraph (B) shall be rounded to the 
          nearest \1/10\ of 1 percentage point.
              ``(3) Gross domestic product deflator.--The gross domestic 
          product deflator for any calendar quarter is the implicit price 
          deflator for the gross domestic product for such quarter (as 
          shown in the last revision thereof released by the Secretary of 
          Commerce before the close of the following calendar quarter).
      ``(d) Suspension of Holding Period Where Diminished Risk of Loss; 
  Treatment of Short Sales.--
              ``(1) In general.--If the taxpayer (or a related person) 
          enters into any transaction which substantially reduces the 
          risk of loss from holding any asset, such asset shall not be 
          treated as an indexed asset for the period of such reduced 
          risk.
              ``(2) Short sales.--
                      ``(A) In general.--In the case of a short sale of 
                  an indexed asset with a short sale period in excess of 
                  3 years, for purposes of this title, the amount 
                  realized shall be an amount equal to the amount 
                  realized (determined without regard to this paragraph) 
                  increased by the applicable inflation adjustment. 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 of acquisition 
                  and the closing date for the sale shall be treated as 
                  the date of disposition.
                      ``(B) Short sale period.--For purposes of 
                  subparagraph (A), the short sale period begins on the 
                  day that the 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) Regulated investment companies.--Stock in a 
                  regulated investment company (within the meaning of 
                  section 851) shall be an indexed asset for any calendar 
                  quarter in the same ratio as--
                              ``(i) the average of the fair market values 
                          of the indexed assets held by such company at 
                          the close of each month during such quarter, 
                          bears to
                              ``(ii) the average of the fair market 
                          values of all assets held by such company at 
                          the close of each such month.
                      ``(B) Real estate investment trusts.--Stock in a 
                  real estate investment trust (within the meaning of 
                  section 856) shall be an indexed asset for any calendar 
                  quarter in the same ratio as--
                              ``(i) the fair market value of the indexed 
                          assets held by such trust at the close of such 
                          quarter, bears to
                              ``(ii) the fair market value of all assets 
                          held by such trust at the close of such 
                          quarter.
                      ``(C) Ratio of 80 percent or more.--If the ratio 
                  for any calendar quarter determined under subparagraph 
                  (A) or (B) would (but for this subparagraph) be 80 
                  percent or more, such ratio for such quarter shall be 
                  100 percent.
                      ``(D) Ratio of 20 percent or less.--If the ratio 
                  for any calendar quarter determined under subparagraph 
                  (A) or (B) would (but for this subparagraph) be 20 
                  percent or less, such ratio for such quarter shall be 
                  zero.
                      ``(E) Look-thru of partnerships.--For purposes of 
                  this paragraph, a qualified investment entity which 
                  holds a partnership interest shall be treated (in lieu 
                  of holding a partnership interest) as holding its 
                  proportionate share of the assets held by the 
                  partnership.
              ``(3) Treatment of return of capital distributions.--Except 
          as otherwise provided by the Secretary, a distribution with 
          respect to stock in a qualified investment entity which is not 
          a dividend and which results in a reduction in the adjusted 
          basis of such stock shall be treated as allocable to stock 
          acquired by the taxpayer in the order in which such stock was 
          acquired.
              ``(4) 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.
                      ``(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.
              ``(4) Indexing adjustment disregarded in determining loss 
          on sale of interest in entity.--Notwithstanding the preceding 
          provisions of this subsection, for purposes of determining the 
          amount of any loss on a sale or exchange of an interest in a 
          partnership, S corporation, or common trust fund, the 
          adjustment made under subsection (a) shall not be taken into 
          account in determining the adjusted basis of such interest.
      ``(g) Dispositions Between Related Persons.--
              ``(1) In general.--This section shall not apply to any sale 
          or other disposition of property between related persons except 
          to the extent that the basis of such property in the hands of 
          the transferee is a substituted basis.
              ``(2) Related persons defined.--For purposes of this 
          section, the term `related persons' means--
                      ``(A) persons bearing a relationship set forth in 
                  section 267(b), and
                      ``(B) persons treated as single employer under 
                  subsection (b) or (c) of section 414.
      ``(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 of improvements, etc.--If there is an 
          addition to the adjusted basis of any tangible property or of 
          any stock in a corporation during the taxable year by reason of 
          an improvement to such property or a contribution to capital of 
          such corporation--
                      ``(A) such addition shall never be taken into 
                  account under subsection (c)(1)(A) if the aggregate 
                  amount thereof during the taxable year with respect to 
                  such property or stock is less than $1,000, and
                      ``(B) such addition shall be treated as a separate 
                  asset acquired at the close of such taxable year if the 
                  aggregate amount thereof during the taxable year with 
                  respect to such property or stock is $1,000 or more.
          A rule similar to the rule of the preceding sentence shall 
          apply to 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 adjustment shall be 
          appropriately reduced for periods during which the asset was 
          not an indexed asset.
              ``(3) Treatment of certain distributions.--A distribution 
          with respect to stock in a corporation which is not a dividend 
          shall be treated as a disposition.
              ``(4) Section cannot increase ordinary loss.--To the extent 
          that (but for this paragraph) this section would create or 
          increase a net ordinary loss to which section 1231(a)(2) 
          applies or an ordinary loss to which any other provision of 
          this title applies, such provision shall not apply. The 
          taxpayer shall be treated as having a long-term capital loss in 
          an amount equal to the amount of the ordinary loss to which the 
          preceding sentence applies.
              ``(5) Acquisition date where there has been prior 
          application of subsection (a)(1) with respect to the 
          taxpayer.--If there has been a prior application of subsection 
          (a)(1) to an asset while such asset was held by the taxpayer, 
          the date of acquisition of such asset by the taxpayer shall be 
          treated as not earlier than the date of the most recent such 
          prior application.
              ``(6) Collapsible corporations.--The application of section 
          341(a) (relating to collapsible corporations) shall be 
          determined without regard to this section.
      ``(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 striking the item relating to 
  section 1023 and by inserting after the item relating to section 1022 
  the following new item:
  
  ``Sec. 1022. Indexing of certain assets for purposes of determining 
                              gain or loss.
  ``Sec. 1023. Cross references.''.
      (c) Effective Date.--The amendments made by this section shall 
  apply to dispositions after December 31, 2006, in taxable years ending 
  after such date.
target: Amends the Internal Revenue Code to allow an inflation adjustment based upon the gross domestic product deflator to the adjusted basis of certain assets (including C corporation common stock and tangible property used in a trade or business) held by a taxpayer for more than three years for purposes of determining gain or loss on the sale or other disposition of such assets.
  
  Sets forth rules for applying such inflation adjustment to short sales, regulated investment companies and real estate investment trusts, partnerships and other pass-thru entities, and dispositions of assets between related persons.
feat_title: To amend the Internal Revenue Code of 1986 to provide for the indexing of certain assets for purposes of determining gain or loss.