[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 26 Introduced in Senate (IS)]
108th CONGRESS
1st Session
S. 26
To amend the Internal Revenue Code of 1986 to provide that dividend and
interest income of individuals not be taxed at rates in excess of the
maximum capital gains rate.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
January 7, 2003
Mrs. Hutchison introduced the following bill; which was read twice and
referred to the Committee on Finance
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to provide that dividend and
interest income of individuals not be taxed at rates in excess of the
maximum capital gains rate.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. DIVIDENDS AND INTEREST OF INDIVIDUALS TAXED AT CAPITAL GAIN
RATES.
(a) In General.--Section 1(h) of the Internal Revenue Code of 1986
(relating to maximum capital gains rate) is amended by adding at the
end the following new paragraph:
``(13) Dividends and interest taxed as net capital gain.--
``(A) In general.--For purposes of this subsection,
the term `net capital gain' means net capital gain
(determined without regard to this paragraph),
increased by qualified dividend income and qualified
interest income.
``(B) Qualified dividend income.--For purposes of
this paragraph--
``(i) In general.--The term `qualified
dividend income' means dividends received from
domestic corporations during the taxable year.
``(ii) Certain dividends excluded.--Such
term shall not include--
``(I) 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,
``(II) any amount allowed as a
deduction under section 591 (relating
to deduction for dividends paid by
mutual savings banks, etc.), and
``(III) any dividend described in
section 404(k).
``(iii) Minimum holding period.--Such term
shall not include any dividend on any share of
stock with respect to which the holding period
requirements of section 246(c) are not met.
``(C) Qualified interest income.--For purposes of
this paragraph, the term `qualified interest income'
means--
``(i) interest on deposits with a bank (as
defined in section 581),
``(ii) amounts (whether or not designated
as interest) paid, in respect of deposits,
investment certificates, or withdrawable or
repurchasable shares, by--
``(I) a mutual savings bank,
cooperative bank, domestic building and
loan association, industrial loan
association or bank, or credit union,
or
``(II) any other savings or thrift
institution which is chartered and
supervised under Federal or State law,
the deposits or accounts in which are insured
under Federal or State law or which are
protected and guaranteed under State law,
``(iii) interest on--
``(I) evidences of indebtedness
(including bonds, debentures, notes,
and certificates) issued by a domestic
corporation in registered form, and
``(II) to the extent provided in
regulations prescribed by the
Secretary, other evidences of
indebtedness issued by a domestic
corporation of a type offered by
corporations to the public,
``(iv) interest on obligations of the
United States, a State, or a political
subdivision of a State (not excluded from gross
income of the taxpayer under any other
provision of law), and
``(v) interest attributable to
participation shares in a trust established and
maintained by a corporation established
pursuant to Federal law.
``(D) Special rules.--
``(i) Amounts taken into account as
investment income.--Qualified dividend income
and qualified interest income shall not include
any amount which the taxpayer takes into
account as investment income under section
163(d)(4)(B).
``(ii) Nonresident aliens.--In the case of
a nonresident alien individual, subparagraph
(A) shall apply only--
``(I) in determining the tax
imposed for the taxable year pursuant
to section 871(b) and only in respect
of amounts which are effectively
connected with the conduct of a trade
or business within the United States,
and
``(II) in determining the tax
imposed for the taxable year pursuant
to section 877.
``(iii) Treatment of dividends from
regulated investment companies and real estate
investment trusts.--
``For treatment of dividends from
regulated investment companies and real estate investment trusts, see
sections 854 and 857.''
(b) Exclusion of Dividends and Interest From Investment Income.--
Subparagraph (B) of section 163(d)(4) of the Internal Revenue Code of
1986 (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 1(h)(13)(B)) or qualified interest
income (as defined in section 1(h)(13)(C)) only to the
extent the taxpayer elects to treat such income as
investment income for purposes of this subsection.''
(c) Treatment of Dividends From Regulated Investment Companies.--
(1) Subsection (a) of section 854 of the Internal Revenue
Code of 1986 (relating to dividends received from regulated
investment companies) is amended by inserting ``section
1(h)(13) (relating to maximum rate of tax on dividends and
interest) and'' after ``For purposes of''.
(2) Paragraph (1) of section 854(b) of such Code (relating
to other dividends) is amended by redesignating subparagraph
(B) as subparagraph (C) and by inserting after subparagraph (A)
the following new subparagraph:
``(B) Maximum rate under section 1(h).--
``(i) In general.--If the sum of the
aggregate dividends received, and the aggregate
interest described in section 1(h)(13)(C)
received, by a regulated investment company
during any taxable year is less than 95 percent
of its gross income, then, in computing the
maximum rate under section 1(h)(13), rules
similar to the rules of subparagraph (A) shall
apply.
``(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--
``(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.''
(3) Subparagraph (C) of section 854(b)(1) of such Code, as
redesignated by paragraph (2), is amended by striking
``subparagraph (A)'' and inserting ``subparagraph (A) or (B)''.
(4) Paragraph (2) of section 854(b) of such Code is amended
by inserting ``the maximum rate under section 1(h)(13) and''
after ``for purposes of''.
(d) Treatment of Dividends Received From Real Estate Investment
Trusts.--Section 857(c) of the Internal Revenue Code of 1986 (relating
to restrictions applicable to dividends received from real estate
investment trusts) is amended to read as follows:
``(c) Restrictions Applicable to Dividends Received From Real
Estate Investment Trusts.--
``(1) In general.--For purposes of section 1(h)(13)
(relating to maximum rate of tax on dividends and interest) and
section 243 (relating to deductions 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.
``(2) Treatment as interest.--
``(A) In general.--For purposes of section
1(h)(13), in the case of a dividend (other than a
capital gain dividend, as defined in subsection
(b)(3)(C)) received from a real estate investment trust
which meets the requirements of this part for the
taxable year in which it paid--
``(i) such dividend shall be treated as
interest if the aggregate interest received by
the real estate investment trust for the
taxable year equals or exceeds 75 percent of
its gross income, or
``(ii) if clause (i) does not apply, the
portion of such dividend which bears the same
ratio to the amount of such dividend as the
aggregate interest received bears to gross
income shall be treated as interest.
``(B) Adjustments to gross income and aggregate
interest received.--For purposes of subparagraph (B)--
``(i) gross income does not include the net
capital gain,
``(ii) gross income and aggregate interest
received shall each be reduced by so much of
the deduction allowable by section 163 for the
taxable year (other than for interest on
mortgages on real property owned by the real
estate investment trust) as does not exceed
aggregate interest received by the taxable
year, and
``(iii) gross income shall be reduced by
the sum of the taxes imposed by paragraphs (4),
(5), and (6) of section 857(b).
``(C) Aggregate interest received.--For purposes of
this subsection, aggregate interest received shall be
computed by taking into account only interest which is
described in section 1(13)(C).
``(D) Notice to shareholders.--The amount of any
distribution by a real estate investment trust which
may be taken into account as interest for purposes of
section 1(h)(13) shall not exceed the amount so
designated by the trust in a written notice to its
shareholders mailed not later than 45 days after the
close of its taxable year.''
(e) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
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