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to be taken into account as investment income primarily because
capital gain and ordinary income were taxed at the same rates.14
However, by 1992, the tax rate differential had widened,
thereby encouraging individuals to structure their transactions
in order to maximize their capital gain potential. Therefore, in
1993, Congress reversed the treatment of capital gains under
section 163(d)(4)(B) so that net capital gain was again excluded
from investment income unless the taxpayer expressly elected to
include it.15 See sec. 13206(d) of the Omnibus Budget
Reconciliation Act of 1993, Pub. L. 103-66, 107 Stat. 312, 467.
The purpose of this amendment was to prevent a taxpayer who
recognizes long-term capital gain taxed at a favorable capital
gain rate from using that same gain to deduct otherwise
nondeductible investment interest expense against ordinary
14See Staff of Joint Comm. on Taxation, General Explanation
of the Tax Reform Act of 1986:
Under prior law, no part of long-term capital gains were
included in net investment income. Congress concluded that
the continuation of this rule was inappropriate because
long-term capital gains are generally taxed at the same
effective rate as ordinary income when the Act is fully
phased in.”
* * * * * * *
Investment income includes * * * gain (whether long-term or
short-term) attributable to the disposition of property held
for investment * * *. [Comm. Print 1987 at 263, 265.]
15Sec. 1.163(d)-1(a), Income Tax Regs., further provides
that “As a consequence, the capital gains affected by this
election are not eligible for the maximum capital gain rate of 28
percent.”
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