text: SECTION 1. 100 PERCENT CAPITAL GAINS DEDUCTION.
  
      (a) General Rule.--Section 1201 of the Internal Revenue Code of 
  1986 is amended to read as follows:
  
  ``SEC. 1201. CAPITAL GAINS DEDUCTION.
  
      ``(a) General Rule.--If for any taxable year a taxpayer has a net 
  capital gain, 100 percent of such gain shall be a deduction from gross 
  income.
      ``(b) Estates and Trusts.--In the case of an estate or trust, the 
  deduction shall be computed by excluding the portion (if any) of the 
  gains for the taxable year from sales or exchanges of capital assets 
  which, under sections 652 and 662 (relating to inclusions of amounts in 
  gross income of beneficiaries of trusts), is includible by the income 
  beneficiaries as gain derived from the sale or exchange of capital 
  assets.
      ``(c) Coordination With Treatment of Capital Gain Under Limitation 
  on Investment Interest.--For purposes of this section, the net capital 
  gain for any taxable year shall be reduced (but not below zero) by the 
  amount which the taxpayer takes into account as investment income under 
  section 163(d)(4)(B)(iii).
      ``(d) Transitional Rules.--
              ``(1) In general.--In the case of a taxable year which 
          includes January 1, 1997--
                      ``(A) the amount taken into account as the net 
                  capital gain under subsection (a) shall not exceed the 
                  net capital gain determined by only taking into account 
                  gains and losses properly taken into account for the 
                  portion of the taxable year on or after January 1, 
                  1997, and
                      ``(B) the amount of the net capital gain taken into 
                  account in applying section 1(h) for such year shall be 
                  reduced by the amount taken into account under 
                  subparagraph (A) for such year.
              ``(2) Special rules for pass-thru entities.--
                      ``(A) In general.--In applying paragraph (1) with 
                  respect to any pass-thru entity, the determination of 
                  when gains and losses are properly taken into account 
                  shall be made at the entity level.
                      ``(B) Pass-thru entity defined.--For purposes of 
                  subparagraph (A), the term `pass-thru entity' means--
                              ``(i) a regulated investment company,
                              ``(ii) a real estate investment trust,
                              ``(iii) an S corporation,
                              ``(iv) a partnership,
                              ``(v) an estate or trust, and
                              ``(vi) a common trust fund.''
      (b) Deduction Allowable in Computing Adjusted Gross Income.--
  Subsection (a) of section 62 of such Code is amended by inserting after 
  paragraph (16) the following new paragraph:
              ``(17) Long-term capital gains.--The deduction allowed by 
          section 1201.''
      (c) Technical and Conforming Changes.--
              (1) Section 1 of such Code is amended by striking 
          subsection (h).
              (2) Section 12 of such Code is amended by striking 
          paragraph (4) and redesignating the following paragraphs 
          accordingly.
              (3)(A) Subsection (a) of section 57 of such Code is amended 
          by striking paragraph (7).
              (B) Subclause (II) of section 53(d)(1)(B)(ii) of such Code 
          is amended by striking ``, (5), and (7)'' and inserting ``and 
          (5)''.
              (4) The first sentence of paragraph (1) of section 170(e) 
          of such Code is amended by striking ``reduced by the sum of--'' 
          and all that follows and inserting ``reduced by the amount of 
          gain which would not have been long-term capital gain if the 
          property contributed had been sold by the taxpayer at its fair 
          market value (determined at the time of such contribution).''
              (5) Paragraph (2) of section 172(d) of such Code is amended 
          to read as follows:
              ``(2) Capital gains and losses.--
                      ``(A) Losses of taxpayers other than 
                  corporations.--In the case of a taxpayer other than a 
                  corporation, the amount deductible on account of losses 
                  from sales or exchanges of capital assets shall not 
                  exceed the amount includible on account of gains from 
                  sales or exchanges of capital assets.
                      ``(B) Deduction for capital gains.--The deduction 
                  under section 1201 shall not be allowed.''
              (6) The last sentence of section 453A(c)(3) of such Code is 
          amended by striking all that follows ``long-term capital 
          gain,'' and inserting ``the deduction under section 1201 shall 
          be taken into account.''
              (7) Paragraph (2) of section 468B(b) of such Code is 
          amended by inserting ``the deduction allowed by section 1201 
          and by'' after ``reduced by''.
              (8) Paragraph (2) of section 527(b) of such Code is hereby 
          repealed.
              (9) Subparagraph (A) of section 641(d)(2) of such Code is 
          amended by striking ``Except as provided in section 1(h), the'' 
          and inserting ``The''.
              (10) Paragraph (4) of section 642(c) of such Code is 
          amended to read as follows:
              ``(4) Adjustments.--To the extent that the amount otherwise 
          allowable as a deduction under this subsection consists of gain 
          from the sale or exchange of capital assets held for more than 
          1 year, proper adjustment shall be made for any deduction 
          allowable to the estate or trust under section 1201 (relating 
          to capital gains deduction). In the case of a trust, the 
          deduction allowed by this subsection shall be subject to 
          section 681 (relating to unrelated business income).''
              (11) The last sentence of section 643(a)(3) of such Code is 
          amended to read as follows: ``The deduction under section 1201 
          (relating to capital gains deduction) shall not be taken into 
          account.''
              (12) Subparagraph (C) of section 643(a)(6) of such Code is 
          amended by inserting ``(i)'' before ``there shall'' and by 
          inserting before the period ``, and (ii) the deduction under 
          section 1201 (relating to capital gains deduction) shall not be 
          taken into account''.
              (13) Paragraph (4) of section 691(c) of such Code is 
          amended by striking ``1(h),''.
              (14) Paragraph (2) of section 801(a) of such Code is hereby 
          repealed.
              (15) Subsection (c) of section 831 of such Code is amended 
          by striking paragraph (1) and redesignating the following 
          paragraphs accordingly.
              (16)(A) Paragraph (3) of section 852(b) of such Code is 
          amended by striking subparagraph (A).
              (B) Subparagraph (D) of section 852(b)(3) of such Code is 
          amended--
                      (i) in clause (i) by striking ``shall not exceed'' 
                  and all that follows and inserting ``shall not exceed 
                  that part of the excess (if any) of the net capital 
                  gain over the deduction for dividends paid (as defined 
                  in section 561 and determined with reference to capital 
                  gain dividends only) which he would have received if 
                  all of such amount had been distributed as capital gain 
                  dividends by the company to the holders of such shares 
                  at the close of its taxable year.'', and
                      (ii) by striking clauses (ii), (iii), and (iv) and 
                  redesignating clause (v) as clause (ii).
              (17)(A) Paragraph (2) of section 857(b) of such Code is 
          amended by adding at the end the following new subparagraph:
                      ``(G) There shall be excluded the amount of the net 
                  capital gain, if any.''
              (B) Paragraph (3) of section 857(b) of such Code is amended 
          by striking subparagraph (A).
              (C) Subparagraph (C) of section 857(b)(3) of such Code is 
          amended by striking ``the excess described in subparagraph 
          (A)(ii) of this paragraph'' and inserting ``the excess (if any) 
          of the net capital gain over the deduction for dividends paid 
          (as defined in section 561 and determined with reference to 
          capital gain dividends only)''.
              (18) The second sentence of section 871(a)(2) of such Code 
          is amended by striking ``1202'' and inserting ``1201''.
              (19) Paragraph (1) of section 882(a) of such Code is 
          amended by striking ``section 11, 55, 59A, or 1201(a)'' and 
          inserting ``section 11, 55, or 59A''.
              (20)(A) Paragraph (2) of section 904(b) of such Code is 
          amended to read as follows:
              ``(2) Capital gains.--Taxable income from sources outside 
          the United States shall include gain from the sale or exchange 
          of capital assets only to the extent of foreign source capital 
          gain net income.''
              (B) Paragraph (3) of section 904(b) of such Code is amended 
          by striking subparagraphs (B), (D), and (E) and by 
          redesignating subparagraph (C) as subparagraph (B).
              (21) Section 1202 of such Code is hereby repealed.
              (22) Subsection (b) of section 1374 of such Code is amended 
          by striking paragraph (4).
              (23) Subsection (b) of section 1381 of such Code is amended 
          by striking ``or 1201''.
              (24) Paragraph (1) of section 1402(i) of such Code is 
          amended by inserting ``, and the deduction provided by section 
          1201 shall not apply'' before the period at the end thereof.
              (25) Subsection (e) of section 1445 of such Code is 
          amended--
                      (A) in paragraph (1) by striking ``35 percent (or, 
                  to the extent provided in regulations, 28 percent)'' 
                  and inserting ``the rate specified by the Secretary'', 
                  and
                      (B) in paragraph (2) by striking ``35 percent'' and 
                  inserting ``the rate specified by the Secretary''.
              (26) Clause (i) of section 6425(c)(1)(A) of such Code is 
          amended by striking ``or 1201(a)''.
              (27) Clause (i) of section 6655(g)(1)(A) of such Code is 
          amended by striking ``or 1201(a)''.
              (28)(A) The second sentence of section 7518(g)(6)(A) of 
          such Code is amended to read as follows:
                  ``No tax shall be imposed under the preceding sentence 
                  with respect to the portion of any nonqualified 
                  withdrawal made out of the capital gain account.''
              (B) The second sentence of section 607(h)(6)(A) of the 
          Merchant Marine Act, 1936, is amended to read as follows:
                  ``No tax shall be imposed under the preceding sentence 
                  with respect to the portion of any nonqualified 
                  withdrawal made out of the capital gain account.''
              (29) The table of sections for part I of subchapter P of 
          chapter 1 of such Code is amended to read as follows:
  
                                ``Sec. 1201. Capital gains deduction.''
      (d) Effective Dates.--
              (1) In general.--Except as otherwise provided in this 
          subsection, the amendments made by this section shall apply to 
          taxable years ending after December 31, 1996.
              (2) Repeal of section 1(h).--The amendment made by 
          subsection (c)(1) shall apply to taxable years beginning after 
          January 1, 1997.
              (3) Contributions.--The amendment made by subsection (c)(4) 
          shall apply only to contributions on or after January 1, 1997.
              (4) Withholding.--The amendment made by subsection (c)(25) 
          shall apply only to amounts paid after the date of the 
          enactment of this Act.
              (5) Coordination with prior transition rule.--Any amount 
          treated as long-term capital gain by reason of paragraph (3) of 
          section 1122(h) of the Tax Reform Act of 1986 shall not be 
          taken into account for purposes of applying section 1201 of the 
          Internal Revenue Code of 1986 (as added by this section).
target: Amends the Internal Revenue Code to replace provisions relating to an alternative tax for corporations on capital gains with provisions making 100 percent of the net capital gain of a taxpayer a deduction from gross income.  Provides for the treatment of estates and trusts. Requires reducing net capital gain by the amount the taxpayer takes into account as investment income under specified provisions.
feat_title: To amend the Internal Revenue Code of 1986 to provide that no capital gains tax shall apply to individuals or corporations.