To permanently extend and modify the research and experimentation tax credit and strike the partial exclusion of dividends provision.

1. Rewrites title II

   Replaces

   In S. 1054 · Placed on Calendar Senate

   Struck: TITLE II--PARTIAL EXCLUSION OF DIVIDENDS

   Struck: SEC. 201. PARTIAL EXCLUSION OF DIVIDENDS RECEIVED BY INDIVIDUALS.

   Struck: (a) General Rule.--Part III of subchapter B of chapter 1 is amended by inserting after section 115 the following new section:

   Struck: "SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS RECEIVED BY INDIVIDUALS.

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   Struck: "(a) Exclusion From Gross Income.--

   Struck: "(1) In general.--Gross income does not include qualified dividend income received during the taxable year by an individual.

   Struck: "(2) Limitation.--Paragraph (1) shall apply to qualified dividend income of a taxpayer only to the extent such income does not exceed the sum of--

   Struck: "(A) $500 ($250 in the case of a married individual filing a separate return), plus "(B) 10 percent (20 percent in the case of taxable years beginning after 2007) of such income in excess of the amount applicable under subparagraph (A).

   Struck: "(b) Qualified Dividend Income.--For purposes of this subsection--

   Struck: "(1) In general.--The term 'qualified dividend income' means dividends received with respect to any share of stock of--

   Struck: "(A) any domestic corporation, or

   Struck: "(B) any foreign corporation but only if such share of stock is readily tradable on an established securities market.

   Struck: "(2) Certain dividends excluded.--Such term shall not include--

   Struck: "(A) any dividend from a corporation which for the taxable year of the corporation in which the distribution is made, or the preceding taxable year, is a corporation exempt from tax under section 501 or 521,

   Struck: "(B) any amount allowed as a deduction under section 591 (relating to deduction for dividends paid by mutual savings banks, etc.), and

   Struck: "(C) any dividend described in section 404(k).

   Struck: "(3) Exclusion of dividends of certain foreign corporations.--Such term shall not include any dividend from a foreign corporation which for the taxable year of the corporation in which the distribution was made, or the preceding taxable year, is a foreign personal holding company (as defined in section 552), a foreign investment company (as defined in section 1246(b)), or a passive foreign investment company (as defined in section 1297).

   Struck: "(4) Coordination with section 246(c).--Such term shall not include any dividend on any share of stock--

   Struck: "(A) with respect to which the holding period requirements of section 246(c) are not met, or

   Struck: "(B) to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.

   Struck: "(c) Special Rules.--

   Struck: "(1) Amounts taken into account as investment income.-- Qualified dividend income shall not include any amount which the taxpayer takes into account as investment income under section 163(d)(4)(B).

   Struck: "(2) Coordination with foreign tax credit and deduction.-- No credit shall be allowed under section 901, and no deduction shall be allowed under this chapter, for any taxes paid or accrued with respect to any income excludable under this section.

   Struck: "(3) Extraordinary dividends.--If an individual receives, with respect to any share of stock, qualified dividend income from 1 or more dividends which are extraordinary dividends (within the meaning of section 1059(c)), any loss on the sale or exchange of such share shall, to the extent of such dividends, be treated as long-term capital loss.

   Struck: "(4) Certain nonresident aliens ineligible for exclusion.--In the case of a nonresident alien individual, subsection (a) shall apply only in determining the tax imposed for the taxable year by sections 871(b)(1) and 877(b).

   Struck: "(5) Exclusion disregarded in determining income for certain purposes.--Subsection (a) shall not apply for purposes of determining amounts of income under sections 32(i), 86(b), 135(b), 137(b), 219(g), 221(b), 222(b), 408A(c)(3), 469(i), and 530(c), or subpart A of part IV of subchapter A.

   Struck: "(6) Treatment of dividends from regulated investment companies and real estate investment trusts.--A dividend from a regulated investment company or real estate investment trust shall be subject to the limitations prescribed in sections 854 and 857.".

   Struck: (b) Exclusion of Dividends From Investment Income.--Subparagraph (B) of section 163(d)(4) (defining net investment income) is amended by adding at the end the following flush sentence: "Such term shall include qualified dividend income (as defined in section 116(b)) only to the extent the taxpayer elects to treat such income as investment income for purposes of this subsection.".

   Struck: (c) Treatment of Dividends From Regulated Investment Companies.--

   Struck: (1) Subsection (a) of section 854 (relating to dividends received from regulated investment companies) is amended by inserting "section 116 (relating to partial exclusion of dividends received by individuals) and" after "For purposes of".

   Struck: (2) Paragraph (1) of section 854(b) (relating to other dividends) is amended by redesignating subparagraph (B) as subparagraph (C) and by inserting after subparagraph (A) the following new subparagraph:

   Struck: "(B) Exclusion under section 116.--

   Struck: "(i) In general.--If the aggregate dividends received by a regulated investment company during any taxable year are less than 95 percent of its gross income, then, in computing the exclusion under section 116, rules similar to the rules of subparagraph (A) shall apply.

   Struck: "(ii) Gross income.--For purposes of clause (i), in the case of 1 or more sales or other dispositions of stock or securities, the term 'gross income' includes only the excess of--

   Struck: "(I) the net short-term capital gain from such sales or dispositions, over "(II) the net long-term capital loss from such sales or dispositions.".

   Struck: (3) Subparagraph (C) of section 854(b)(1), as redesignated by paragraph (2), is amended by striking "subparagraph (A)" and inserting "subparagraph (A) or (B)".

   Struck: (4) Paragraph (2) of section 854(b) is amended by inserting "the exclusion under section 116 and" after "for purposes of".

   Struck: (5) Subsection (b) of section 854 is amended by adding at the end the following new paragraph:

   Struck: "(5) Coordination with section 116.--For purposes of paragraph (1)(B), an amount shall be treated as a dividend only if the amount is qualified dividend income (within the meaning of section 116(b)).".

   Struck: (d) Treatment of Dividends Received From Real Estate Investment Trusts.--Section 857(c) (relating to restrictions applicable to dividends received from real estate investment trusts) is amended to read as follows:

   Struck: "(c) Restrictions Applicable To Dividends Received From Real Estate Investment Trusts.--

   Struck: "(1) Section 243.--For purposes of section 243 (relating to deductions for dividends received by corporations), a dividend received from a real estate investment trust which meets the requirements of this part shall not be considered a dividend.

   Struck: "(2) Section 116.--For purposes of section 116 (relating to exclusion of dividends), rules similar to the rules of section 854(b)(1)(B) shall apply to dividends received from a real estate trust which meets the requirements of this part.".

   Struck: (e) Conforming Amendments.--

   Struck: (1) Subsection (f) of section 301 is amended adding at the end the following new paragraph:

   Struck: "(4) For partial exclusion from gross income of dividends received by individuals, see section 116.".

   Struck: (2) Paragraph (1) of section 306(a) is amended by adding at the end the following new subparagraph:

   Struck: "(D) Treatment as dividend.--For purposes of section 116, any amount treated as ordinary income under this paragraph shall be treated as a dividend received from the corporation.".

   Struck: (3)(A) Subpart C of part II of subchapter C of chapter 1 (relating to collapsible corporations) is repealed.

   Struck: (B)(i) Section 338(h) is amended by striking paragraph (14).

   Struck: (ii) Sections 467(c)(5)(C), 1255(b)(2), and 1257(d) are each amended by striking ", 341(e)(12),".

   Struck: (iii) The table of subparts for part II of subchapter C of chapter 1 is amended by striking the item related to subpart C.

   Struck: (4) Section 531(a) is amended by inserting "90 percent (80 percent in the case of taxable years beginning after 2007) of" after "equal to".

   Struck: (5) Section 541(a) is amended by inserting "90 percent (80 percent in the case of taxable years beginning after 2007) of" after "equal to".

   Struck: (6) Section 584(c) is amended by adding at the end the following new flush sentence: "The proportionate share of each participant in the amount of dividends received by the common trust fund and to which section 116 applies shall be considered for purposes of such paragraph as having been received by such participant.".

   Struck: (7) Section 643(a) is amended by redesignating paragraph (7) as paragraph (8) and by inserting after paragraph (6) the following new paragraph:

   Struck: "(7) Excluded dividends.--There shall be included the amount of any dividends excluded from gross income under section 116 (relating to partial exclusion of dividends).".

   Struck: (8) Paragraph (5) of section 702(a) is amended to read as follows:

   Struck: "(5) dividends with respect to which section 116 or part VII of subchapter B applies,".

   Struck: (f) Effective Date.--The amendments made by this section shall apply to taxable years beginning after December 31, 2003.

   Inserted: TITLE II--RESEARCH CREDIT

   Inserted: SEC. 201. PERMANENT EXTENSION OF RESEARCH CREDIT.

   Inserted: (a) In General.--Section 41 (relating to credit for increasing research activities) is amended by striking subsection (h).

   Inserted: (b) Conforming Amendment.--Paragraph (1) of section 45C(b) is amended by striking subparagraph (D).

   Inserted: (c) Effective Date.--The amendments made by this section shall apply to amounts paid or incurred after the date of the enactment of this Act.

   Inserted: SEC. 202. INCREASE IN RATES OF ALTERNATIVE INCREMENTAL CREDIT.

   Inserted: (a) In General.--Subparagraph (A) of section 41(c)(4) (relating to election of alternative incremental credit) is amended--

   Inserted: (1) by striking "2.65 percent" and inserting "3 percent",

   Inserted: (2) by striking "3.2 percent" and inserting "4 percent", and

   Inserted: (3) by striking "3.75 percent" and inserting "5 percent".

   Inserted: (b) Effective Date.--The amendment made by this section shall apply to taxable years ending after the date of the enactment of this Act.

   Inserted: SEC. 203. ALTERNATIVE SIMPLIFIED CREDIT FOR QUALIFIED RESEARCH EXPENSES.

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   Inserted: (a) In General.--Subsection (c) of section 41 (relating to base amount) is amended by redesignating paragraphs (5) and (6) as paragraphs (6) and (7), respectively, and by inserting after paragraph (4) the following new paragraph:

   Inserted: "(5) Election of alternative simplified credit.--

   Inserted: "(A) In general.--At the election of the taxpayer, the credit determined under subsection (a)(1) shall be equal to 12 percent of so much of the qualified research expenses for the taxable year as exceeds 50 percent of the average qualified research expenses for the 3 taxable years preceding the taxable year for which the credit is being determined.

   Inserted: "(B) Special rule in case of no qualified research expenses in any of 3 preceding taxable years.--

   Inserted: "(i) Taxpayers to which subparagraph applies.--The credit under this paragraph shall be determined under this subparagraph if the taxpayer has no qualified research expenses in any 1 of the 3 taxable years preceding the taxable year for which the credit is being determined.

   Inserted: "(ii) Credit rate.--The credit determined under this subparagraph shall be equal to 6 percent of the qualified research expenses for the taxable year.

   Inserted: "(C) Election.--An election under this paragraph shall apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the Secretary. An election under this paragraph may not be made for any taxable year to which an election under paragraph (4) applies.".

   Inserted: (b) Coordination With Election of Alternative Incremental Credit.--

   Inserted: (1) In general.--Section 41(c)(4)(B) (relating to election) is amended by adding at the end the following: "An election under this paragraph may not be made for any taxable year to which an election under paragraph (5) applies.".

   Inserted: (2) Transition rule.--In the case of an election under section 41(c)(4) of the Internal Revenue Code of 1986 which applies to the taxable year which includes the date of the enactment of this Act, such election shall be treated as revoked with the consent of the Secretary of the Treasury if the taxpayer makes an election under section 41(c)(5) of such Code (as added by subsection (a)) for such year.

   Inserted: (c) Effective Date.--The amendments made by this section shall apply to taxable years ending after the date of the enactment of this Act.

   Original wording

   Strike title II and insert the following:

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As printed