To provide a dividend exclusion which eliminates the double taxation of corporate dividends.

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--DIVIDEND EXCLUSION TO ELIMINATE DOUBLE TAXATION OF CORPORATE EARNINGS

   Inserted: SEC. 201. DIVIDEND EXCLUSION TO ELIMINATE DOUBLE TAXATION OF CORPORATE EARNINGS.

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

   Inserted: "SEC. 116. DIVIDEND EXCLUSION TO ELIMINATE DOUBLE TAXATION OF CORPORATE EARNINGS.

   Inserted: "(a) Exclusion.--Gross income does not include the excludable portion (as defined in section 281) of any amount received as a dividend.

   Inserted: "(b) Reporting to Shareholders.--For reporting to shareholders, see section 6042."

   Inserted: (b) Clerical Amendment.--The table of sections for such part III is amended by inserting after the item relating to section 115 the following new item:

   Inserted: "Sec. 116. Dividend exclusion to eliminate double taxation of corporate earnings."

   Inserted: SEC. 202. RULES FOR APPLICATION OF DIVIDEND EXCLUSION.

   Inserted: (a) In General.--Subchapter B of chapter 1 (as amended by subsection (d)) is amended by inserting after part IX the following new part:

   Inserted: "PART X--RULES FOR APPLICATION OF DIVIDEND EXCLUSION

   Inserted: "Sec. 281. Excludable portion of dividends.

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   Inserted: "Sec. 282. Special rules for credits and refunds.

   Inserted: "Sec. 283. Special rules for foreign corporations and shareholders.

   Inserted: "Sec. 284. Other special rules.

   Inserted: "Sec. 285. Regulations.

   Inserted: "Sec. 286. Phasein and Termination.

   Inserted: "SEC. 281. EXCLUDABLE PORTION OF DIVIDENDS.

   Inserted: "(a) Excludable Portion.--For purposes of section 116, the term 'excludable portion' means, with respect to any dividend paid by a corporation in a calendar year, an amount which bears the same ratio to such dividend as the excludable dividend amount of such corporation for the calendar year bears to the total amount of dividends paid by such corporation in such calendar year.

   Inserted: "(b) Excludable Dividend Amount.--For purposes of this part and section 116--

   Inserted: "(1) In general.--The term 'excludable dividend amount' means, with respect to any corporation for any calendar year, the excess of--

   Inserted: "(A) the sum of--

   Inserted: "(i) the fully taxed earnings amount for the preceding calendar year, and

   Inserted: "(ii) the aggregate amount of dividends received by the corporation during such preceding year which are excluded from gross income under section 116(a), over

   Inserted: "(B) the amount of applicable income tax taken into account under subparagraph (A)(i).

   Inserted: "(2) Carryover of excess of excludable dividend amount over dividends paid.--The excludable dividend amount of a corporation for any calendar year shall be increased by the excess of--

   Inserted: "(A) the excludable dividend amount of such corporation for the preceding calendar year, over

   Inserted: "(B) the aggregate amount paid by the corporation as dividends during such preceding calendar year.

   Inserted: "(c) Fully Taxed Earnings Amount.--

   Inserted: "(1) In general.--The fully taxed earnings amount for any calendar year is the amount of the applicable income tax shown on applicable returns for such year divided by the highest rate of tax specified in section 11.

   Inserted: "(2) Increase for prior year assessments.--The fully taxed earnings amount for any calendar year shall be increased by the amount of any applicable income tax (not previously taken into account under paragraph (1)) which is assessed during such year divided by the highest rate of tax specified in section 11.

   Inserted: "(3) Limitation to amount paid.--If an amount described in paragraph (1) or (2) is paid after the close of the calendar year in which such amount would (but for this paragraph) be taken into account, such amount shall be taken into account for the calendar year in which paid.

   Inserted: "(4) Highest rate of tax.--For purposes of this subsection, the highest rate of tax specified in section 11 with respect to any applicable income tax shall be such highest rate for the taxable year for which (or by reference to which) such tax is determined.

   Inserted: "(d) Definitions.--For purposes of this part--

   Inserted: "(1) Applicable income tax.--

   Inserted: "(A) In general.--The term 'applicable income tax' means the excess (if any) of--

   Inserted: "(i) the sum of the taxes imposed by sections 11, 55, 511, 801, 831, 882, 1201, 1291 (without regard to section 1291(c)(1)(B)), and 1374, over

   Inserted: "(ii) the sum of the credits under part IV of subchapter A (other than subpart C and section 27(a)).

   Inserted: "(B) Transitional rules.--

   Inserted: "(i) In general.--Such term shall not include any tax imposed for any taxable year ending before April 1, 2001.

   Inserted: "(ii) Treatment of minimum tax credit.--The applicable income tax shall not be reduced by the credit under section 53 attributable (determined as if such credit were used on a first-in first-out basis) to taxable years ending before April 1, 2001.

   Inserted: "(iii) Section 1374.--The reference to section 1374 in subparagraph (A)(i) shall not apply to taxable years beginning before January 1, 2003.

   Inserted: "(iv) Other taxes included.--The taxes imposed by sections 531 and 541 (as in effect before their repeal) shall be taken into account under subparagraph (A)(i) for taxable years ending after March 31, 2001, and beginning before January 1, 2004.

   Inserted: "(2) Applicable return.--

   Inserted: "(A) In general.--The term 'applicable return' means, with respect to a calendar year, any return of applicable income tax for a taxable year if the 15th day of the 9th month following the close of such taxable year occurs during such calendar year.

   Inserted: "(B) Filing requirement.--If a return is filed after the close of the calendar year with respect to which such return would (but for this subparagraph) be treated as an applicable return under subparagraph (A), such return shall be treated as an applicable return for the calendar year in which filed.

   Inserted: "SEC. 282. SPECIAL RULES FOR CREDITS AND REFUNDS.

   Inserted: "(a) In General.--No overpayment of an applicable income tax by a corporation may be allowed as a credit or refund to the extent that the overpayment exceeds the sum of--

   Inserted: "(1) the aggregate applicable income taxes otherwise taken into account under section 281 for determining the excludable dividend amount for the calendar year succeeding the calendar year in which the credit or refund would otherwise be allowed or made, and

   Inserted: "(2) an amount equal to the lesser of--

   Inserted: "(A) the product of the corporation's excludable dividend amount for such calendar year and the fraction the numerator of which is the highest rate of tax specified in section 11 (within the meaning of section 281(c)(4)) and the denominator of which is 1 minus such highest rate, or

   Inserted: "(B) the amount specified by the corporation for purposes of this paragraph.

   Inserted: "(b) Adjustments to Excludable Dividend Amounts Resulting From Credits and Refunds.--If subsection (a) applies to any credit or refund which is allowed or made in a calendar year--

   Inserted: "(1) the applicable income taxes described in subsection (a)(1) otherwise taken into account under section 281 for determining the excludable dividend amount for the succeeding calendar year shall be reduced (but not below zero) by the amount of the credit or refund, and

   Inserted: "(2) the excludable dividend amount for the calendar year shall be reduced by the excess of--

   Inserted: "(A) the amount determined under subsection (a)(2) divided by the highest rate of tax specified in section 11, over

   Inserted: "(B) the amount determined under subsection (a)(2).

   Inserted: "(c) Disallowed Overpayment Not Lost.--Nothing in subsection (a) shall be construed to reduce the amount of any overpayment for which credit or refund is not allowed by reason of subsection (a), and such overpayment shall continue to be taken into account in applying subsection (a) for succeeding calendar years until a credit or refund is allowed or made.

   Inserted: "(d) Exception for Foreign Tax Credit.--This section shall not apply to any overpayment to the extent that such overpayment is attributable to the credit allowed under section 27(a).

   Inserted: "(e) Denial of Interest.--No interest shall be allowed on any overpayment during the period that credit or refund of such overpayment is not allowed by reason of this section.

   Inserted: "SEC. 283. SPECIAL RULES FOR FOREIGN CORPORATIONS AND SHAREHOLDERS.

   Inserted: "(a) Computation of Excludable Dividend Amounts of Foreign Corporations.--

   Inserted: "(1) Reduction in excludable dividend amount for certain taxes.--The reduction under section 281(b)(1)(B) (without regard to this subparagraph) shall be increased by the sum of--

   Inserted: "(A) the taxes imposed by section 884 (relating to branch profits tax), and

   Inserted: "(B) so much of the taxes imposed by section 881 as are attributable to dividends which would (but for subsection (b)) be excludable under section 116.

   Inserted: "(2) Treatment of disallowed exclusions.--Notwithstanding subsection (b), the excludable dividend amount of a foreign corporation for a calendar year shall be increased by the dividends received by the corporation which (but for subsection (b)) would be excludable under section 116(a).

   Inserted: "(b) Taxation of Foreign Shareholders.--In the case of a shareholder who is a nonresident alien individual or a foreign corporation, no dividends shall be excludable under section 116(a).

   Inserted: "(c) Rules Relating to Foreign Tax Credit.--

   Inserted: "(1) In general.--No credit shall be allowed under section 901 for any taxes paid or accrued (or deemed paid under section 902 or 960) with respect to any dividend excludable under section 116.

   Inserted: "(2) Excludable dividend amount.--The excludable dividend amount of a corporation for any calendar year shall be determined without regard to a reduction in the credit allowed by section 27(a) on an applicable return for a prior calendar year.

   Inserted: "SEC. 284. OTHER SPECIAL RULES.

   Inserted: "(a) Redemptions.--If a corporation makes a distribution to a shareholder during any calendar year with respect to its stock and section 301 does not apply to such distribution, the excludable dividend amount as of the beginning of the calendar year shall be reduced by the ratable share of such amounts attributable to the stock so redeemed.

   Inserted: "(b) Coordination With Section 246(c).--

   Inserted: "(1) Holding period requirements.--If a shareholder disposes of any share of stock before the holding period requirements of section 246(c) are met, the basis of such share shall be reduced by the amount of dividends received with respect to such share which are excludable under section 116(a).

   Inserted: "(2) Related payments.--No deduction shall be allowed under this chapter for any related payments described in section 246(c)(1)(B) with respect to any dividend excludable under section 116(a) with respect to any share of stock to the extent that such payments do not exceed the amount of such dividend or basis increase.

   Inserted: "(3) Treatment of disallowed exclusions and adjustments.--The excludable dividend amount of any corporation for a calendar year, and its earnings and profits, shall not be increased by the dividends received by the corporation which are excludable under section 116(a) and which resulted in a basis reduction under paragraph (1).

   Inserted: "(c) Treatment of Regulated Investment Companies and Real Estate Investment Trusts.--

   Inserted: "(1) In general.--Except as provided in regulations, the excludable dividend amount of a regulated investment company or real estate investment trust shall be zero.

   Inserted: "(2) Cross reference.--

   Inserted: "For special rules relating to application of this part to regulated investment companies and real estate investment trusts, see section 852(g).

   Inserted: "(d) Exclusion Reduced Where Portfolio Stock Held by Corporation is Debt-Financed.--

   Inserted: "(1) Treatment of excludable dividend.--In the case of any debt-financed portfolio stock (within the meaning of section 246A) held by a corporation, the amount excluded under section 116(a) with respect to any dividend received with respect to such stock shall be an amount equal to the product of--

   Inserted: "(A) the amount which would be excluded under section 116(a) without regard to this paragraph, and

   Inserted: "(B) 100 percent minus the average indebtedness percentage (within the meaning of section 246A(d)).

   Inserted: "(2) Limitation.--The aggregate amount of reductions under paragraph (1) with respect to any debt-financed portfolio stock shall not exceed the amount of interest deduction (including any deductible short sale expense) allocable to such stock.

   Inserted: "(3) Exception.--This subsection shall not apply to any dividend described in paragraph (1) or (2) of section 246A(b).

   Inserted: "(e) Treatment of Variable Annuity Contracts.--

   Inserted: "(1) In general.--A life insurance company may allocate (at such time and manner as the Secretary shall prescribe) to a qualified variable annuity contract based on a segregated asset account dividends received which would (but for section 803(c)) be excludable under section 116(a) with respect to stock held in such account.

   Inserted: "(2) Treatment of amounts allocated.--

   Inserted: "(A) Amounts allocated on or before annuity starting date.--Any amount allocated under paragraph (1) to a contract on or before the annuity starting date shall be treated for purposes of section 72 as an additional investment in the contract.

   Inserted: "(B) Amounts allocated after annuity starting date.--If any amount is allocated under paragraph (1) to a contract after the annuity starting date, the amounts otherwise includible in gross income with respect to amounts received as an annuity under such contract after the date of such allocation shall be reduced by the amount so allocated.

   Inserted: "(3) Qualified variable annuity contract.--For purposes of this subsection, the term 'qualified variable annuity contract' means any annuity contract described in section 817(d)(3)(A). Such term shall not include a pension plan contract (within the meaning of section 818).

   Inserted: "(4) Information reporting.--The Secretary may require such reporting as may be appropriate for purposes of this paragraph.

   Inserted: "(f) Cooperatives.--In the case of a cooperative to which subchapter T applies--

   Inserted: "(1) the excludable dividend amount of such cooperative shall be allocated for purposes of section 116 and this part between shares of such cooperative held by patrons and shares held by other persons in such manner as the Secretary shall prescribe by regulations, and

   Inserted: "(2) no deduction shall be allowed to the cooperative under this chapter for any dividend paid to a patron which is excludable under section 116(a).

   Inserted: "(g) ESOP Stock.--Any dividend allowed as a deduction under section 404(k) shall not be treated as a dividend for purposes of section 116 and this part.

   Inserted: "SEC. 285. REGULATIONS.

   Inserted: "The Secretary shall prescribe such regulations as may be appropriate to carry out section 116 and this part, including regulations--

   Inserted: "(1) providing for the treatment of options and convertible debt as stock, including modification of the attribution rules under section 318(a)(4),

   Inserted: "(2) providing for the allocation of the excludable dividend amount in the case of transactions described in section 312(h),

   Inserted: "(3) waiving the application of section 246(c)(4) for purposes of sections 284(b) and 1059(g),

   Inserted: "(4) modifying the consolidated return regulations to the extent necessary or appropriate to apply the provisions of this part, including regulations that accelerate the inclusion in the excludable dividend amount of a higher-tier member with respect to--

   Inserted: "(A) activities of lower-tier members of the group, and

   Inserted: "(B) dividends excludable under section 116(a) received from such lower-tier members,

   Inserted: "(5) providing for the application of section 116 and this part in the case of pass-thru entities, including appropriate adjustments to basis, and

   Inserted: "(6) as are necessary to further the purposes of section 116 and this part and to prevent the circumvention of such purposes.

   Inserted: Any regulations under paragraph (4) may be effective as of the effective date of this part.

   Inserted: "SEC. 286. PHASEIN AND TERMINATION.

   Inserted: "(a) Phasein of Excludable Dividend Amount.--In computing the excludable dividend amount for any calendar year, only 50 percent of the applicable income taxes for a taxable year beginning before April 1, 2002, shall be taken into account.

   Inserted: "(b) Termination.--

   Inserted: "(1) In general.--Except as provided in this subsection, section 116 and this part shall not apply to any calendar year after calendar year 2006, and the excludable dividend amount for any such year shall be zero.

   Inserted: "(2) Credits and refunds.--Section 282 shall apply to any credit or refund after December 31, 2006, of an applicable income tax taken into account in determining the excludable dividend account for calendar year 2003, 2004, 2005, or 2006.".

   Inserted: (b) Reporting of Excludable Dividends.--

   Inserted: (1) In general.--Section 6042(a) (relating to returns regarding payments of dividends and corporate earnings and profits) is amended to read as follows:

   Inserted: "(a) Requirement of Reporting.--

   Inserted: "(1) In general.--Every person--

   Inserted: "(A) who makes payments of dividends aggregating $10 or more to any other person during any calendar year, or

   Inserted: "(B) who receives such payments of dividends as a nominee and who makes payments aggregating $10 or more during any calendar year to any other person with respect to the dividends received, shall make a return at the time and in the manner prescribed by the Secretary, setting forth the information described in paragraph (3).

   Inserted: "(2) Returns required by secretary.--Every person who makes payments of dividends to which paragraph (1) does not apply shall, when required by the Secretary, make a return setting forth the information described in paragraph (3).

   Inserted: "(3) Information reported.--Information described in this paragraph includes--

   Inserted: "(A) the aggregate amount of dividends, including the portion of such amount excludable from gross income under section 116(a), and

   Inserted: "(B) such other information as the Secretary may require.

   Inserted: In the case of a nominee described in paragraph (1)(B), this paragraph shall apply with respect to the payments and allocations made by the nominee."

   Inserted: (2) Application to foreign persons.--Section 6042 is amended by adding at the end the following new subsection:

   Inserted: "(e) Application to Foreign Persons.--The Secretary may provide for the application of this section to payments, allocations, and distributions made by or to a foreign person to the extent necessary to carry out the provisions of section 116 and part X of subchapter B of chapter 1."

   Inserted: (3) Conforming amendment.--Section 6042(c)(2) is amended to read as follows:

   Inserted: "(2) the information described in subsection (a)(3) required to be shown on the return."

   Inserted: (c) Amendments to Other Sections.--

   Inserted: (1) Minimum tax.--Clause (i) of section 56(g)(4)(B) is amended by striking "or under section 114" and inserting ", section 114, or section 116".

   Inserted: (2) Coordination with dividend received deductions.--

   Inserted: (A) Section 246 is amended by adding at the end the following new subsection:

   Inserted: "(f) Coordination With Dividend Exclusion.--No deduction shall be allowed under section 243, 244, or 245 with respect to the amount of any dividend excluded from gross income under section 116 or would be so excluded but for sections 283(b) and 284(d)."

   Inserted: (B) Section 243 is amended by adding at the end the following new subsection:

   Inserted: "(f) Termination.--Paragraph (1) of subsection (a) shall not apply to any dividend received by a corporation after December 31, 2005."

   Inserted: (3) Carryovers in certain corporation acquisitions.--Section 381(c) is amended by adding at the end the following new paragraph:

   Inserted: "(27) Excludable dividend amount.--The acquiring corporation shall take into account (to the extent proper to carry out the purposes of this section, section 116, and part X of subchapter B, and under such regulation as may be prescribed by the Secretary) the excludable dividend amount in respect of the distributor or transferor."

   Inserted: (4) Trusts and estates.--Subsection (a) of section 643 is amended--

   Inserted: (A) by redesignating paragraph (7) as paragraph (8) and by inserting after paragraph (6) the following new paragraph:

   Inserted: "(7) Dividends, etc.--There shall be included the amount of any dividends excluded from gross income under section 116.", and

   Inserted: (B) by striking "and (6)" in the last sentence and inserting ", (6), and (7)".

   Inserted: (5) Partnerships.--Paragraph (5) of section 702(a) is amended to read as follows:

   Inserted: "(5) dividends with respect to which there is an exclusion under section 116 or a deduction under part VIII of subchapter B,".

   Inserted: (6) Extraordinary dividends.--

   Inserted: (A) In general.--Section 1059 is amended by redesignating subsection (g) as subsection (h) and by inserting after subsection (f) the following new subsection:

   Inserted: "(g) Treatment of Excludable Dividends as Extraordinary Dividends.--

   Inserted: "(1) In general.--For purposes of this section, any dividend excludable under section 116(a) shall be treated as an extraordinary dividend, except that this section shall be applied by substituting '1 year (or such other period as the Secretary may prescribe)' for '2 years' each place it appears.

   Inserted: "(2) Treatment of deemed extraordinary dividends.--The excludable dividend amount of any corporation for a calendar year, and its earnings and profits, shall not be increased by the dividends received by the corporation which are treated as extraordinary dividends by reason of paragraph (1).

   Inserted: "(3) Coordination with section 284(b).--This section shall not apply to any dividend excludable under section 116(a) with respect to which section 284(b) applies.

   Inserted: "(4) Regulations.--The Secretary may by regulation provide for exceptions to the application of paragraph (1)."

   Inserted: (B) Paragraph (3) of section 1059(d) is amended by inserting "section 1223(11) shall not apply and" after "subsection (a),".

   Inserted: (C)(i) Section 1059 is amended by striking "corporation" each place it appears in subsection (a) and inserting "taxpayer".

   Inserted: (ii) The section heading for section 1059 is amended by striking "CORPORATE" and by inserting "AND EXCLUDABLE" before "DIVIDENDS".

   Inserted: (iii) The item relating to section 1059 in the table of sections for part IV of subchapter O of chapter 1 is amended--

   Inserted: (I) by striking "Corporate" and inserting "Shareholder's", and

   Inserted: (II) by inserting "and excludable" before "dividends".

   Inserted: (7) Private foundations.--Section 4940(c) is amended by adding at the end the following new paragraph:

   Inserted: "(6) Coordination with dividend exclusion.--For purposes of this section, gross investment income shall not include a dividend to the extent excluded from gross income under section 116(a)."

   Inserted: (d) Conforming Amendments.--

   Inserted: (1)(A) Part X of subchapter B of chapter 1, as in effect on the day before the date of the enactment of this Act, is hereby moved after part XI of such subchapter B and redesignated as part XII.

   Inserted: (B) Section 281, as so in effect, is redesignated as section 296.

   Inserted: (C) The table of sections for such part XII, as so designated, is amended by striking "Sec. 281" and inserting "Sec. 296."

   Inserted: (D) The table of parts for subchapter B of chapter 1 is amended by striking the items relating to parts X and XI and inserting the following new items:

   Inserted: "Part X. Rules for application of dividend exclusion.

   Inserted: "Part XI. Special rules relating to corporate preference items.

   Inserted: "Part XII. Terminal railroad corporations and their shareholders."

   Inserted: (2) Subsection (f) of section 301 is amended by adding at the end the following new paragraph:

   Inserted: "(4) For exclusion from gross income of certain dividends, see section 116."

   Inserted: SEC. 203. TREATMENT OF REGULATED INVESTMENT COMPANIES AND REAL ESTATE INVESTMENT TRUSTS.

   Inserted: (a) In General.--Section 852 is amended by adding at the end the following new subsection:

   Inserted: "(g) Special Rules Relating to Section 116 and Part X of Subchapter B.--

   Inserted: "(1) Excludable portion.--

   Inserted: "(A) In general.--For purposes of section 116(a), the excludable portion of any dividend paid by any qualified investment entity shall be the amount so designated by such entity in a written notice mailed to its shareholders not later than 60 days after the close of its taxable year in which such dividend is paid.

   Inserted: "(B) Limitation.--If the aggregate amount so designated with respect to a taxable year (including dividends paid after the close of the taxable year as described in section 855) exceeds the aggregate amount of dividends received by such entity during such year which are excludable from gross income under section 116(a), then the amount of a dividend otherwise excludable by reason of a designation under subparagraph (A) shall be reduced by an amount which bears the same ratio to the amount otherwise excludable as such excess bears to the total amount designated under subparagraph (A).

   Inserted: "(C) Treatment of capital gain and exempt-interest dividends.--Any amount designated under subparagraph (A) as excludable under section 116 may not be treated as a capital gain dividend or an exempt-interest dividend.

   Inserted: "(D) Coordination with section 853.--The election under section 853 shall not apply to dividends excludable under section 116 received by a qualified investment entity.

   Inserted: "(2) Definitions.--For purposes of this subsection--

   Inserted: "(A) Qualified investment entity.--The term 'qualified investment entity' means--

   Inserted: "(i) a regulated investment company, and

   Inserted: "(ii) a real estate investment trust.

   Inserted: "(B) Exempt-interest dividend.--The term 'exempt-interest dividend' has the meaning given to such term by subsection (b)(5)."

   Inserted: (b) Other Rules Relating to Regulated Investment Companies.--

   Inserted: (1) Distribution requirements.--Clause (i) of section 852(a)(1)(B) is amended by inserting "and its dividend income excludable under section 116(a)," before "over".

   Inserted: (2) Taxation of entity and shareholders.--

   Inserted: (A) The material following paragraph (3) of section 851(b) is amended by inserting "and dividends excludable from gross income under section 116(a)" after "103(a)" in the third sentence.

   Inserted: (B) Section 852(b)(2)(D) is amended by striking "and exempt-interest dividends" and inserting ", exempt-interest dividends, and any dividends excludable under section 116(a)".

   Inserted: (C) Subparagraph (B) of section 852(b)(4) is amended to read as follows:

   Inserted: "(B) Loss attributable to exempt dividends.--If--

   Inserted: "(i) a shareholder of a regulated investment company receives an exempt-interest dividend or a dividend excludable under section 116(a) with respect to any share, and

   Inserted: "(ii) such share is held by the taxpayer for 6 months or less, then any loss on the sale or exchange of such share shall, to the extent of the sum of the amounts of such dividends be disallowed."

   Inserted: (D) Paragraph (3) of section 4982(c) is amended by striking "and" at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting ", and", and by adding at the end the following new subparagraph:

   Inserted: "(C) any dividend excludable from gross income under section 116(a)."

   Inserted: (c) Other Rules Relating to Real Estate Investment Trusts.--

   Inserted: (1) Distribution requirements.--Subparagraph (A) of section 857(a)(1) is amended by striking "and" at the end of clause (i), by striking "minus" at the end of clause (ii), and by inserting at the end the following new clause:

   Inserted: "(iii) 90 percent of its dividend income excludable under section 116(a); minus"

   Inserted: (2) Taxation of entity and shareholders.--

   Inserted: (A)(i) Section 856(c)(2) is amended--

   Inserted: (I) by inserting "(including dividends excludable from gross income under section 116(a))" after "dividends" in subparagraph (A), and

   Inserted: (II) by inserting "(including tax-exempt interest)" after "interest" in subparagraph (B).

   Inserted: (ii) Section 856(c) is amended by adding at the end the following new paragraph:

   Inserted: "(8) Gross income tests.--For purposes of paragraphs (2) and (3), gross income shall be treated as including tax-exempt interest and dividends excludable from gross income under section 116(a)."

   Inserted: (B) Section 857(b)(2)(B) is amended by inserting " or any dividends paid which are excludable under section 116(a)" after "subparagraph (D)".

   Inserted: (C) Section 857(b) is amended by adding at the end the following new paragraph:

   Inserted: "(10) Loss attributable to exempt dividends.--If--

   Inserted: "(A) a taxpayer receives a dividend excludable under section 116(a) with respect to any share of stock of, or a certificate of beneficial interest in, a real estate investment trust, and

   Inserted: "(B) such share or certificate is held by the taxpayer for 6 months or less, then any loss on the sale or exchange of such share or certificate shall, to the extent of the sum of the amounts of such dividends, be disallowed."

   Inserted: (D) Paragraph (1) of section 4981(c) is amended by striking "and" at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting ", and", and by adding at the end the following new subparagraph:

   Inserted: "(C) any dividend excludable from gross income under section 116(a)."

   Inserted: SEC. 204. TREATMENT OF INSURANCE COMPANIES.

   Inserted: (a) Life Insurance Companies.--

   Inserted: (1) Section 803 is amended by adding at the end the following new subsection:

   Inserted: "(c) Special Rules for Excludable Dividends.--

   Inserted: "(1) In general.--The exclusion under section 116(a) with respect to any dividend received by a life insurance company shall only apply to such company's share (as determined under section 812) of such dividend.

   Inserted: "(2) Rules for segregated asset accounts.--In the case of stock held in a segregated asset account (within the meaning of section 817), this subsection shall be applied as if the policyholders' share of the excludable portion of any dividend with respect to such stock were 100 percent.

   Inserted: "(3) Computation of excludable dividend amount.--In the case of a life insurance company, the increase under clause (ii) of section 281(b)(1)(A) in the company's excludable dividend amount shall be limited to the company's share (as determined under section 812) of the dividends described in such clause."

   Inserted: (2) Section 812(d)(1)(A) is amended by inserting "(including dividends excludable under section 116(a))" after "dividends".

   Inserted: (3) Section 815(c)(2)(A)(iii) is amended by adding "and the amount of dividends excludable under section 116(a) (as modified by section 803(c)(1))," after "section 103".

   Inserted: (b) Other Insurance Companies.--

   Inserted: (1) Section 832(b)(5)(B) is amended by striking "and" at the end of clause (ii), by striking the period at the end of clause (iii) and inserting ", and", and by adding after clause (iii) the following new clause:

   Inserted: "(iv) any dividend excludable under section 116(a) which is received during such taxable year."

   Inserted: (2) Section 832(c) is amended by striking "and" at the end of paragraph (12), by striking the period at the end of paragraph (13) and inserting "; and", and by adding at the end the following new paragraph:

   Inserted: "(14) the amount of dividends received during the taxable year which are excluded from gross income under section 116(a)."

   Inserted: (3) Section 833(b)(3)(E) is amended--

   Inserted: (A) by striking "and" at the end of clause (i), by striking the period at the end of clause (ii) and inserting ", and", and by inserting after clause (ii) the following new clause:

   Inserted: "(iii) the aggregate amount excluded for the taxable year under section 116(a).", and

   Inserted: (B) by adding at the end the following: "The amount determined under clause (iii) shall be reduced by the amount of any decrease in such deductions for the taxable year by reason of section 832(b)(5)(B) to the extent such decrease is attributable to the exclusion under section 116(a)."

   Inserted: (4) Section 834(c) is amended by adding at the end the following new paragraph:

   Inserted: "(10) Excludable dividends.--The amount of dividends received during the taxable year which are excluded from gross income under section 116(a)."

   Inserted: SEC. 205. TREATMENT OF S CORPORATIONS.

   Inserted: (a) Application of Section 116 and Part X of Subchapter B to S Corporations.--Section 1368 is amended by adding at the end the following new subsection:

   Inserted: "(f) Coordination With Dividend Exclusion.--

   Inserted: "(1) Determination of excluded dividends amount.--

   Inserted: "(A) In general.--Clause (ii) of section 281(b)(1)(A) shall not apply to amounts received or allocated in a taxable year for which the corporation is an S corporation.

   Inserted: "(B) Cross reference.--

   Inserted: "For treatment of taxes imposed by section 1374, see section 281(d)(1).

   Inserted: "(2) Distributions.--Subject to regulations prescribed by the Secretary, the preceding provisions of this section shall not apply to any dividend excludable from gross income under section 116(a)."

   Inserted: (c) Modification to Treatment of Section 1374 Tax.--

   Inserted: (1) Paragraph (2) of section 1366(f) is amended to read as follows:

   Inserted: "(2) Treatment of built-in gains.--The amount of the items of the net recognized built-in gain taken into account under section 1374(b)(1) (reduced by any deduction allowed under section 1374(b)(2)) shall not be taken into account under this section."

   Inserted: (2)(A) Subsection (c) of section 1371 is amended by adding at the end the following new paragraph:

   Inserted: "(4) Treatment of built-in gain.--The accumulated earnings and profits of the corporation shall be increased at the beginning of the taxable year by the amount not taken into account under section 1366 by reason of section 1366(f)(2) (determined without regard any reduction of such amount under section 1374(b)(2)) reduced by the tax imposed by section 1374 (net of credits allowed)."

   Inserted: (B) Paragraph (1) of section 1371(c) is amended by striking "and (3)" and inserting ", (3), and (4)".

   Inserted: (d) Repeal of Tax and Termination Where Excess Passive Investment Income.--

   Inserted: (1) Repeal of tax.--

   Inserted: (A) In general.--Section 1375 is repealed.

   Inserted: (B) Conforming amendments.--Sections 26(b)(2)(J) and 1366(f)(3) are repealed.

   Inserted: (2) Repeal of termination.--Section 1362(d) is amended by striking paragraph (3).

   Inserted: (e) Treatment of Accumulated Adjustments Account.--Subsection (e) of section 1368 is amended by adding at the end the following new paragraph:

   Inserted: "(4) Treatment of certain distributions.--The accumulated adjustments account for any taxable year shall be increased by the sum of the dividends excludable under section 116(a) received by the corporation during such taxable year."

   Inserted: SEC. 206. REPEAL OF ACCUMULATED EARNINGS TAX AND PERSONAL HOLDING COMPANY TAX.

   Inserted: (a) In General.--Parts I and II of subchapter G of chapter 1 (relating to corporations improperly accumulating surplus and to personal holding companies) are hereby repealed.

   Inserted: (b) Conforming Amendments.--

   Inserted: (1) Section 12 is amended by striking paragraph (2) and by redesignating paragraphs (3), (4), (5), (6), and (7) as paragraphs (2), (3), (4), (5), and (6), respectively.

   Inserted: (2) Section 26(b)(2) is amended by striking subparagraphs (F) and (G).

   Inserted: (3) Section 30A(c) is amended by inserting "or" at the end of paragraph (1), by striking paragraphs (2) and (3), and by redesignating paragraph (4) as paragraph (2).

   Inserted: (4) Section 41(e)(7)(E) is amended by adding "and" at the end of clause (i), by striking clause (ii), and by redesignating clause (iii) as clause (ii).

   Inserted: (5) Section 56(b)(2) is amended by striking subparagraph (C) and by redesignating subparagraph (D) as subparagraph (C).

   Inserted: (6) Section 111 is amended by striking subsection (d).

   Inserted: (7) Section 170(e)(4)(D) is amended by adding "and" at the end of clause (i), by striking clause (ii), and by redesignating clause (iii) as clause (ii).

   Inserted: (8) Sections 170(f)(10)(A), 508(d), 4947, and 4948(c)(4) are each amended by striking "545(b)(2)," each place it appears.

   Inserted: (9)(A) Section 316(b) is amended by striking paragraph (2) and by redesignating paragraph (3) as paragraph (2).

   Inserted: (B) Section 331(b) is amended by striking "(other than a distribution referred to in paragraph (2)(B) of section 316(b))".

   Inserted: (10) Section 341(d) is amended--

   Inserted: (A) by striking "section 544(a) (relating to personal holding companies)" and inserting "section 465(f) (relating to constructive ownership rules)", and

   Inserted: (B) by inserting before the period at the end of the next to the last sentence "and such paragraph (2) shall be applied by inserting 'or by or for his partner' after 'his family' ".

   Inserted: (11) Section 381(c) is amended by striking paragraphs (14) and (17).

   Inserted: (12) Section 443(e) is amended by striking paragraphs (1) and (2) and by redesignating paragraphs (3), (4), and (5) as paragraphs (1), (2), and (3), respectively.

   Inserted: (13) Section 447(g)(4)(A) is amended by striking "other than--" and all that follows and inserting "other than an S corporation."

   Inserted: (14)(A) Section 465(a)(1)(B) is amended to read as follows:

   Inserted: "(B) a C corporation which is closely held,".

   Inserted: (B) Section 465(a)(3) is amended to read as follows:

   Inserted: "(3) Closely held determination.--For purposes of paragraph (1), a corporation is closely held if, at any time during the last half of the taxable year, more than 50 percent in value of its outstanding stock is owned, directly or indirectly, by or for not more than 5 individuals. For purposes of this paragraph, an organization described in section 401(a), 501(c)(17), or 509(a) or a portion of a trust permanently set aside or to be used exclusively for the purposes described in section 642(c) shall be considered an individual."

   Inserted: (C) Section 465(c)(7)(B) is amended by striking clause (i) and by redesignating clauses (ii) and (iii) as clauses (i) and (ii), respectively.

   Inserted: (D) Section 465(c)(7)(G) is amended to read as follows:

   Inserted: "(G) Loss of 1 member of affiliated group may not offset income of personal service corporation.--Nothing in this paragraph shall permit any loss of a member of an affiliated group to be used as an offset against the income of any other member of such group which is a personal service corporation (as defined in section 269A(b) but determined by substituting '5 percent' for '10 percent' in section 269A(b)(2))."

   Inserted: (E) Section 465 is amended by adding at the end the following new subsection:

   Inserted: "(f) Constructive Ownership Rules.--For purposes of subsection (a)(3)--

   Inserted: "(1) Stock not owned by individual.--Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by its shareholders, partners, or beneficiaries.

   Inserted: "(2) Family ownership.--An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family. For purposes of this paragraph, the family of an individual includes only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.

   Inserted: "(3) Options.--If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock.

   Inserted: "(4) Application of family and option rules.--Paragraphs (2) and (3) shall be applied if, but only if, the effect is to make the corporation closely held under subsection (a)(3).

   Inserted: "(5) Constructive ownership as actual ownership.--Stock constructively owned by a person by reason of the application of paragraph (1) or (3), shall, for purposes of applying paragraph (1) or (2), be treated as actually owned by such person; but stock constructively owned by an individual by reason of the application of paragraph (2) shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock.

   Inserted: "(6) Option rule in lieu of family rule.--If stock may be considered as owned by an individual under either paragraph (2) or (3) it shall be considered as owned by him under paragraph (3).

   Inserted: "(7) Convertible securities.--Outstanding securities convertible into stock (whether or not convertible during the taxable year) shall be considered as outstanding stock if the effect of the inclusion of all such securities is to make the corporation closely held under subsection (a)(3). The requirement under the preceding sentence that all convertible securities must be included if any are to be included shall be subject to the exception that, where some of the outstanding securities are convertible only after a later date than in the case of others, the class having the earlier conversion date may be included although the others are not included, but no convertible securities shall be included unless all outstanding securities having a prior conversion date are also included."

   Inserted: (15)(A) Section 553(a)(1) is amended by striking "section 543(d)" and inserting "subsection (c)".

   Inserted: (B) Section 553 is amended by adding at the end the following new subsection:

   Inserted: "(c) Active Business Computer Software Royalties.--

   Inserted: "(1) In general.--For purposes of subsection (a), the term 'active business computer software royalties' means any royalties--

   Inserted: "(A) received by any corporation during the taxable year in connection with the licensing of computer software, and

   Inserted: "(B) with respect to which the requirements of paragraphs (2), (3), and (4) are met.

   Inserted: "(2) Royalties must be received by corporation actively engaged in computer software business.--The requirements of this paragraph are met if the royalties described in paragraph (1)--

   Inserted: "(A) are received by a corporation engaged in the active conduct of the trade or business of developing, manufacturing, or producing computer software, and

   Inserted: "(B) are attributable to computer software which--

   Inserted: "(i) is developed, manufactured, or produced by such corporation (or its predecessor) in connection with the trade or business described in subparagraph (A), or

   Inserted: "(ii) is directly related to such trade or business.

   Inserted: "(3) Royalties must constitute at least 50 percent of income.--The requirements of this paragraph are met if the royalties described in paragraph (1) constitute at least 50 percent of the ordinary gross income of the corporation for the taxable year.

   Inserted: "(4) Deductions under sections 162 and 174 relating to royalties must equal or exceed 25 percent of ordinary gross income.--

   Inserted: "(A) In general.--The requirements of this paragraph are met if--

   Inserted: "(i) the sum of the deductions allowable to the corporation under sections 162, 174, and 195 for the taxable year which are properly allocable to the trade or business described in paragraph (2) equals or exceeds 25 percent of the ordinary gross income of such corporation for such taxable year, or

   Inserted: "(ii) the average of such deductions for the 5-taxable year period ending with such taxable year equals or exceeds 25 percent of the average ordinary gross income of such corporation for such period. If a corporation has not been in existence during the 5-taxable year period described in clause (ii), then the period of existence of such corporation shall be substituted for such 5-taxable year period.

   Inserted: "(B) Deductions allowable under section 162.--For purposes of subparagraph (A), a deduction shall not be treated as allowable under section 162 if it is specifically allowable under another section.

   Inserted: "(C) Limitation on allowable deductions.--For purposes of subparagraph (A), no deduction shall be taken into account with respect to compensation for personal services rendered by the 5 individual shareholders holding the largest percentage (by value) of the outstanding stock of the corporation. For purposes of the preceding sentence individuals holding less than 5 percent (by value) of the stock of such corporation shall not be taken into account."

   Inserted: (16) Section 556(b)(1) is amended by striking ", but not including" and all that follows and inserting a period.

   Inserted: (17) Section 561(a) is amended by striking paragraph (3), by inserting "and" at the end of paragraph (1), and by striking ", and" at the end of paragraph (2) and inserting a period.

   Inserted: (18) Section 562(b) is amended to read as follows:

   Inserted: "(b) Distributions in Liquidation.--Except in the case of a foreign personal holding company described in section 552--

   Inserted: "(1) in the case of amounts distributed in liquidation, the part of such distribution which is properly chargeable to earnings and profits accumulated after February 28, 1913, shall be treated as a dividend for purposes of computing the dividends paid deduction, and

   Inserted: "(2) in the case of a complete liquidation occurring within 24 months after the adoption of a plan of liquidation, any distribution within such period pursuant to such plan shall, to the extent of the earnings and profits (computed without regard to capital losses) of the corporation for the taxable year in which such distribution is made, be treated as a dividend for purposes of computing the dividends paid deduction.

   Inserted: For purposes of paragraph (1), a liquidation includes a redemption of stock to which section 302 applies. Except to the extent provided in regulations, the preceding sentence shall not apply in the case of any mere holding or investment company which is not a regulated investment company."

   Inserted: (19) Section 563 is amended by striking subsections (a) and (b), by redesignating subsections (c) and (d) as subsections (a) and (b), and by striking ", (b), or (c)" in subsection (b) (as so redesignated).

   Inserted: (20) Section 564 is hereby repealed.

   Inserted: (21) Section 631(c) is amended by striking the next to the last sentence and inserting the following: "This subsection shall have no application for purposes of applying subchapter G (relating to corporations used to avoid income tax on shareholders).".

   Inserted: (22) Section 852(b)(1) is amended by striking "which is a personal holding company (as defined in section 542) or".

   Inserted: (23)(A) Section 856(h)(1) is amended to read as follows:

   Inserted: "(1) In general.--For purposes of subsection (a)(6), a corporation, trust, or association is closely held if the stock ownership requirement of section 465(a)(3) is met.".

   Inserted: (B) Section 856(h)(3)(A)(i) is amended by striking "section 542(a)(2)" and inserting "section 465(a)(3)".

   Inserted: (C) Paragraph (3) of section 856(h) is amended by striking subparagraph (B) and by redesignating subparagraphs (C) and (D) as subparagraphs (B) and (C), respectively.

   Inserted: (D) Subparagraph (C) of section 856(h)(3), as redesignated by the preceding subparagraph, is amended by striking "subparagraph (C)" and inserting "subparagraph (B)".

   Inserted: (24) The last sentence of section 882(c)(2) is amended to read as follows:

   Inserted: "The preceding sentence shall not be construed to deny the credit provided by section 33 for tax withheld at source or the credit provided by section 34 for certain uses of gasoline.".

   Inserted: (25) Section 936(a)(3) is amended by striking subparagraphs (B) and (C), by inserting "or" at the end of subparagraph (A), and by redesignating subparagraph (D) as subparagraph (B).

   Inserted: (26) Section 936 is amended by striking subsection (g).

   Inserted: (27) Section 992(d) is amended by striking paragraph (2) and by redesignating paragraphs (3), (4), (5), (6), and (7) as paragraphs (2), (3), (4), (5), and (6), respectively.

   Inserted: (28) Section 992 is amended by striking subsection (e).

   Inserted: (29) Section 1202(e)(8) is amended by striking "section 543(d)(1)" and inserting "section 553(c)(1)".

   Inserted: (30) Section 1298(b) is amended by striking paragraph (8) and redesignating paragraph (9) as paragraph (8).

   Inserted: (31) Section 1504(c)(2)(B) is amended by adding "and" at the end of clause (i), by striking clause (ii), and by redesignating clause (iii) as clause (ii).

   Inserted: (32)(A) Section 1551(a) is amended by striking "or the accumulated earnings credit" and all that follows and inserting "unless such transferee corporation shall establish by the clear preponderance of the evidence that the securing of such benefits was not a major purpose of such transfer.".

   Inserted: (B) The section heading for section 1551 is amended by striking "AND ACCUMULATED EARNINGS CREDIT".

   Inserted: (C) The item relating to section 1551 in the table of sections for part I of subchapter B of chapter 6 is amended by striking "and accumulated earnings credit".

   Inserted: (33)(A) Section 1561(a) is amended--

   Inserted: (i) by striking paragraph (2),

   Inserted: (ii) by redesignating paragraphs (3) and (4) as paragraphs (2) and (3),

   Inserted: (iii) by striking "paragraph (3)" each place it appears and inserting "paragraph (2)",

   Inserted: (iv) by striking "paragraph (4)" and inserting "paragraph (3)", and

   Inserted: (v) by striking the third sentence.

   Inserted: (B) Section 1561(b) is amended to read as follows:

   Inserted: "(b) Certain Short Taxable Years.--If a corporation has a short taxable year which does not include a December 31 and is a component member of a controlled group of corporations with respect to such taxable year, then for purposes of this subtitle, the amount in each taxable income bracket in the tax table in section 11(b) for such corporation for such taxable year shall be the amount specified in subsection (a)(1), divided by the number of corporations which are component members of such group on the last day of such taxable year. For purposes of the preceding sentence, section 1563(b) shall be applied as if such last day were substituted for December 31.".

   Inserted: (34) Section 2057(e)(2)(C) is amended by adding at the end the following new sentence: "References to sections 542 and 543 in the preceding sentence shall be treated as references to such sections as in effect on the day before their repeal."

   Inserted: (35) Sections 6422 is amended by striking paragraph (3) and by redesignating paragraphs (4) through (12) and paragraphs (3) through (11), respectively.

   Inserted: (36) Section 6501 is amended by striking subsection (f).

   Inserted: (37) Section 6503(k) of such Code is amended by striking paragraph (1) and by redesignating paragraphs (2) through (5) as paragraphs (1) through (4), respectively.

   Inserted: (38) Section 6515 is amended by striking paragraph (1) and by redesignating paragraphs (2) through (6) as paragraphs (1) through (5), respectively.

   Inserted: (39) Section 6601(b) is amended by striking paragraph (4) and redesignating paragraph (5) as paragraph (4).

   Inserted: (40) Subsections (d)(1)(B) and (e)(2) of section 6662 of such Code are each amended by striking "or a personal holding company (as defined in section 542)".

   Inserted: (41) Section 6683 is hereby repealed.

   Inserted: (42) Section 7518(c)(1) is amended by inserting "and" at the end of subparagraph (C), by striking ", and" at the end of subparagraph (D) and inserting a period, and by striking subparagraph (E).

   Inserted: (c) Clerical Amendments.--

   Inserted: (1) The table of parts for subchapter G of chapter 1 of such Code is amended by striking the items relating to parts I and II.

   Inserted: (2) The table of sections for part IV of such subchapter G is amended by striking the item relating to section 564.

   Inserted: (3) The table of sections for part I of subchapter B of chapter 68 of such Code is amended by striking the item relating to section 6683.

   Inserted: SEC. 207. EFFECTIVE DATES.

   Inserted: (a) In General.--Except as otherwise provided in this title, the amendments made by this title shall apply to distributions received after December 31, 2002, and before January 1, 2007.

   Inserted: (b) Special Rules.--

   Inserted: (1) Section 1374 tax.--In applying the amendments made by this section, any tax imposed by section 1374 of the Internal Revenue Code of 1986 for any taxable year beginning before January 1, 2003, shall not be taken into account.

   Inserted: (2) Section 205 (c) and (d) and section 206.--The amendments made by subsections (c) and (d) of section 205 and by section 206 shall apply to taxable years beginning after December 31, 2003, and before January 1, 2007; except that--

   Inserted: (A) section 547 of such Code (as in effect before its repeal) shall continue to apply to deficiency dividends (as defined in section 547(d) of such Code) relating to taxable years beginning before January 1, 2004, and

   Inserted: (B) subsections (a) and (b) of section 563 of such Code (as so in effect) shall continue to apply to dividends relating to taxable years beginning before January 1, 2004.

   Inserted: Notwithstanding subparagraphs (A) and (B), such dividends shall not be taken into account in applying section 116 of such Code or part X of subchapter B of chapter 1 of such Code.

   Inserted: (3) Section 282.--Section 282 of such Code (as added by this title) shall apply to taxable years ending after the date of the enactment of this Act.

   Original wording

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As printed