[Congressional Bills 107th Congress]
[From the U.S. Government Publishing Office]
[S. 551 Introduced in Senate (IS)]







107th CONGRESS
  1st Session
                                 S. 551

 To amend the Internal Revenue Code of 1986 to simplify the individual 
income tax by providing an election for eligible individuals to only be 
   subject to a 15 percent tax on wage income with a tax return free 
   filing system, to reduce the burdens of the marriage penalty and 
            alternative minimum tax, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             March 15, 2001

  Mr. Dorgan (for himself, Mr. Gregg, and Mr. Durbin) 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 simplify the individual 
income tax by providing an election for eligible individuals to only be 
   subject to a 15 percent tax on wage income with a tax return free 
   filing system, to reduce the burdens of the marriage penalty and 
            alternative minimum tax, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``Fair and Simple 
Shortcut Tax Plan''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.

               TITLE I--FAIR AND SIMPLE SHORTCUT TAX PLAN

SEC. 101. FAIR AND SIMPLE SHORTCUT TAX PLAN.

    (a) In General.--Subchapter A of chapter 1 (relating to 
determination of tax liability) is amended by adding at the end the 
following:

             ``PART VIII--FAIR AND SIMPLE SHORTCUT TAX PLAN

                              ``Sec.  60.  Tax on individuals electing 
                                        FASST.
                              ``Sec.  60A.  Computation of applicable 
                                        taxable income.
                              ``Sec.  60B.  Credit against tax.
                              ``Sec.  60C.  Election.
                              ``Sec.  60D.  Liability for tax.

``SEC. 60. TAX ON INDIVIDUALS ELECTING FASST.

    ``(a) Tax Imposed.--If an individual who is an eligible taxpayer 
has an election in effect under this part for a taxable year, there is 
hereby imposed a tax equal to 15 percent of the taxpayer's applicable 
taxable income.
    ``(b) Coordination With Other Taxes.--The tax imposed by this 
section shall be in lieu of any other tax imposed by this subchapter. 
The preceding sentence shall not apply to taxes described in section 
26(b)(2) other than subparagraph (A) thereof.

``SEC. 60A. COMPUTATION OF APPLICABLE TAXABLE INCOME.

    ``(a) In General.--For purposes of this part, the term `applicable 
taxable income' means the taxpayer's applicable wage income, minus--
            ``(1) the standard deduction,
            ``(2) the deductions for personal exemptions provided in 
        section 151, and
            ``(3) the homeowner expense deduction allowable under 
        subsection (c).
    ``(b) Applicable Wage Income.--For purposes of this part--
            ``(1) In general.--The term `applicable wage income' means, 
        with respect to an individual, wages received by such 
        individual for the taxable year for services performed as an 
        employee of an employer.
            ``(2) Employment.--The term `employment' has the meaning 
        given such term in section 3121(b).
            ``(3) Wages.--The term `wages' has the meaning given such 
        term in section 3401(a).
    ``(c) Homeowner Expense Deduction Allowed.--
            ``(1) In general.--For purposes of subsection (a), there 
        shall be allowed as a deduction for the taxable year an amount 
        equal to the product of--
                    ``(A) $5,000, and
                    ``(B) a fraction, the numerator of which is the 
                number of months in such year in which the taxpayer 
                owned and used property as the taxpayer's principal 
                residence (within the meaning of section 121) and the 
                denominator of which is 12.
            ``(2) Special rules.--For purposes of this subsection--
                    ``(A) Married individuals.--In the case of a 
                married individual, the ownership and use requirements 
                of paragraph (1) shall be treated as met for any month 
                if either spouse meets them.
                    ``(B) Divorce; cooperative housing.--Rules similar 
                to the rules of paragraphs (3) and (4) of section 
                121(d) shall apply.
                    ``(C) Out-of-residence care.--If a taxpayer becomes 
                physically or mentally impaired while owning and using 
                property as a principal residence, then the taxpayer 
                shall be treated as meeting the ownership and use 
                requirements of paragraph (1) during any period the 
                taxpayer owns the property and resides in any facility 
                (including a nursing home) licensed by a State or 
                political subdivision to care for an individual in the 
                taxpayer's condition.

``SEC. 60B. CREDITS AGAINST TAX.

    ``No credit shall be allowed against the tax imposed by this part 
other than--
            ``(1) the credit allowable under section 24 (relating to 
        child tax credit),
            ``(2) the credit allowable under section 32 (relating to 
        earned income credit), and
            ``(3) the credit for overpayment of tax under section 6402.

``SEC. 60C. ELECTION.

    ``(a) Election.--An eligible taxpayer may elect to have this part 
apply for any taxable year.
    ``(b) Eligible Taxpayer.--
            ``(1) In general.--For purposes of this part, the term 
        `eligible taxpayer' means, with respect to any taxable year, a 
        taxpayer who receives--
                    ``(A) applicable wage income in an amount not in 
                excess of--
                            ``(i) $100,000, in the case of a taxpayer 
                        described in section 1(a), and
                            ``(ii) 50 percent of the amount in effect 
                        under clause (i) for the taxable year, in the 
                        case of any other taxpayer, and
                    ``(B) gross income (determined without regard to 
                applicable wage income) in an amount not in excess of--
                            ``(i) $5,000, in the case of a taxpayer 
                        described in section 1(a), and
                            ``(ii) 50 percent of the amount in effect 
                        under clause (i) for the taxable year, in the 
                        case of any other taxpayer.
            ``(2) Exclusions.--The term `eligible taxpayer' shall not 
        include--
                    ``(A) a married individual unless the individual 
                and the spouse both have the same taxable year and both 
                make the election,
                    ``(B) a nonresident alien individual, or
                    ``(C) an estate or trust.
            ``(3) Inflation adjustments.--In the case of a taxable year 
        beginning after 2002, each dollar amount under paragraph (1) 
        shall be increased by an amount equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in which 
                the taxable year begins, determined by substituting 
                `calendar year 2001' for `calendar year 1992' in 
                subparagraph (B) thereof.
    ``(c) Form of Election.--
            ``(1) In general.--An individual shall make an election to 
        have this part apply for any taxable year by furnishing an 
        election certificate to such individual's employer not later 
        than the close of the first payroll period after the individual 
        commences work for such employer or January 1 of the taxable 
        year to which such election relates, whichever is later.
            ``(2) Contents of certificate.--The election certificate 
        furnished under paragraph (1) shall--
                    ``(A) contain such information as the Secretary 
                requires to enable the Secretary to carry out this part 
                and enable the employer to withhold the appropriate 
                amount of wages under section 3402, and
                    ``(B) contain a certification by the employee under 
                penalty of perjury that the information furnished is 
                correct.
            ``(3) Amendment of certificate.--A new election certificate 
        shall be filed within 30 days after the date of any change in 
        the information required under paragraph (2).
            ``(4) Election certificate.--For purposes of this section, 
        the term `election certificate' means the withholding exemption 
        certificate used for purposes of chapter 24.
            ``(5) Advance payment of earned income amount.--The 
        Secretary shall prescribe such regulations as may be necessary 
        to allow an eligible taxpayer to treat an election certificate 
        furnished under this section as including an earned income 
        eligibility certificate under section 3507 in the case of an 
        eligible individual claiming the earned income credit under 
        section 32.
    ``(d) Period Election In Effect.--
            ``(1) In general.--Except as provided in paragraph (2), an 
        election under this section shall be effective for the taxable 
        year for which it is made and all subsequent taxable years.
            ``(2) Termination.--An election under this part shall 
        terminate with respect to an individual for any taxable year 
        and all subsequent taxable years if at any time during such 
        taxable year such individual--
                    ``(A) is no longer an eligible taxpayer,
                    ``(B) elects to terminate such individual's 
                election, or
                    ``(C) commits fraud with respect to any information 
                required to be provided under this section.
    ``(e) Safe Harbor for Ineligibility.--In the case of an individual 
who has a termination under subsection (c)(2)(A), no addition to tax 
under section 6654 shall apply to any underpayment attributable to 
eligible wage income of such individual for such taxable year if such 
underpayment was not due to fraud, negligence, or disregard of rules or 
regulations (within the meaning of section 6662).
    ``(f) Marital Status.--For purposes of this part, marital status 
shall be determined under section 7703.

``SEC. 60D. LIABILITY FOR TAX.

    ``(a) Amount Withheld Treated as Satisfaction of Liability.--Except 
as provided in this section, any amount withheld as tax under section 
3402(t) for an eligible individual with an election in effect under 
section 60C for the taxable year shall be treated as complete 
satisfaction of liability for the tax imposed by section 60(a) for such 
taxable year.
    ``(b) Exceptions.--Notwithstanding subsection (a)--
            ``(1) Overpayment.--If the amount withheld as tax under 
        section 3402(t) for an eligible taxpayer with an election in 
        effect under section 60C for the taxable year exceeds the tax 
        imposed under section 60(a) for the taxable year, the excess 
        amount shall be treated as an overpayment for purposes of 
        section 6402.
            ``(2) Underpayment.--
                    ``(A) In general.--If the Secretary determines that 
                the amount withheld as tax under section 3402(t) for an 
                eligible taxpayer is less than the tax imposed under 
                section 60(a) and such underpayment is not due to 
                fraud, the Secretary may assess and collect such 
                underpayment in the same manner as if such underpayment 
                were on account of a mathematical or clerical error 
                appearing on a return of the individual for the taxable 
                year.
                    ``(B) De minimis exception.--If the amount by which 
                the tax imposed by section 60(a) exceeds the amount 
                withheld as tax under section 3402(t) by less than the 
                lesser of $100 or 10 percent of the tax so imposed, the 
                taxpayer shall be treated as having no underpayment.
    ``(c) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary to carry out the provisions of this section, 
including regulations--
            ``(1) to allow a refund of an overpayment under subsection 
        (b)(1) to a taxpayer without requiring additional filing of 
        information by the taxpayer, and
            ``(2) to notify taxpayers of eligibility for credits 
        allowable under section 60B and allow a claim and refund of any 
        credit not claimed by an eligible taxpayer during the taxable 
        year.''.
    (b) Withholding From Wages.--Section 3402 (relating to income tax 
collected at source) is amended by adding at the end the following new 
subsection:
    ``(t) Withholding Under the Fair and Simple Shortcut Tax Plan.--
            ``(1) In general.--An employer making payment of wages to 
        an individual with an election in effect under section 60C 
        shall deduct and withhold upon such wages a tax (in lieu of the 
        tax required to be deducted and withheld under subsection (a)) 
        determined in accordance with tables prescribed by the 
        Secretary in accordance with paragraph (2).
            ``(2) Withholding tables.--The Secretary shall prescribe 1 
        or more tables which set forth amounts of wages and income tax 
        to be deducted and withheld based on information furnished to 
        the employer in the employee's election form and to ensure that 
        the aggregate amount withheld from such employee's wages 
        approximates the tax liability of such individual for the 
        taxable year. Any tables prescribed under this paragraph 
        shall--
                    ``(A) apply with respect to the amount of wages 
                paid during such periods as the Secretary may 
                prescribe, and
                    ``(B) be in such form, and provide for such amounts 
                to be deducted and withheld, as the Secretary 
                determines to be most appropriate to carry out the 
                purposes of this chapter and to reflect the provisions 
                of chapter 1 applicable to such periods, including 
                taking into account any credits allowable under section 
                24 or 32.
        The Secretary shall provide that any other provision of this 
        section shall not apply to the extent such provision is 
        inconsistent with the provisions of this subsection.
            ``(2) Election certificate.--
                    ``(A) In general.--In lieu of a withholding 
                exemption certificate, an employee shall furnish the 
                employer with a signed election certificate and any 
                amended election certificate at such time and 
                containing such information as required under section 
                60C.
                    ``(B) When certificate takes effect.--
                            ``(i) First certificate furnished.--An 
                        election certificate furnished to an employer 
                        in cases in which no previous such certificate 
                        is in effect shall take effect as of the 
                        beginning of the first payroll period ending, 
                        or the first payment of wages made without 
                        regard to a payroll period, on or after the 
                        date on which such certificate is so furnished.
                            ``(ii) Replacement certificate.--An 
                        election certificate furnished to an employer 
                        which replaces an earlier certificate shall 
                        take effect as of the beginning of the 1st 
                        payroll period ending (or the 1st payment of 
                        wages made without regard to a payroll period) 
                        on or after the 30th day after the on date 
                        which the replacement certificate is so 
                        furnished.''.
    (c) Waiver of Requirement to File Return of Income.--Subsection 
(a)(1)(A) of section 6012 (relating to persons required to make return 
of income) is amended by striking ``or'' at the end of clause (iii), by 
striking the period at the end of clause (iv) and inserting ``, or'', 
and by inserting after clause (iv) the following new clause:
                            ``(v) who is an eligible taxpayer with an 
                        election in effect for the taxable year under 
                        section 60C.''.
    (d) Technical and Conforming Amendments.--
            (1) The table of parts for subchapter A of chapter 1 is 
        amended by adding at the end the following new item:

``Part VIII. Fair and Simple Shortcut Tax Plan.''.
            (2) Section 6654(a) is amended by inserting ``and section 
        60C(d)'' after ``this section''.
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.

SEC. 102. TAX CREDIT FOR EMPLOYER FASST PLAN STARTUP COSTS.

    (a) In General.--Subpart D of part IV of subchapter A of chapter 1 
(relating to business related credits) is amended by adding at the end 
the following new section:

``SEC. 45E. FASST PLAN EMPLOYER START-UP CREDIT.

    ``(a) Credit Allowed.--
            ``(1) In general.--For purposes of section 38, the Fair and 
        Simple Shortcut Tax plan start-up credit determined under this 
        section for the taxable year is an amount equal to the lesser 
        of--
                    ``(A) 50 percent of eligible start-up costs of the 
                taxpayer for the taxable year, or
                    ``(B) $1,000.
            ``(2) Maximum credit.--The maximum credit allowed with 
        respect to a taxpayer under this subsection for all taxable 
        years shall not exceed the amount determined under paragraph 
        (1) for all taxable years.
    ``(b) Eligible Start-Up Costs.--For purposes of this section, the 
term `eligible start-up costs' means amounts paid or incurred by an 
employer (or any predecessor) during the 1 year period beginning on the 
date on which the employer first employs 1 or more employees with an 
election in effect under section 60C for the taxable year, in 
connection with carrying out the withholding requirements of section 
3402.
    ``(c) Credit Available for Each Worksite.--If a taxpayer maintains 
a separate worksite for employees, such person shall be treated as a 
single employer with respect to such worksite for purposes of the 
credit allowable under subsection (a).''.
    (b) Conforming Amendments.--
            (1) Section 38(b) is amended--
                    (A) by striking ``plus'' at the end of paragraph 
                (12),
                    (B) by striking the period at the end of paragraph 
                (13), and inserting a comma and ``plus'', and
                    (C) by adding at the end the following new 
                paragraph:
            ``(14) the Fair and Simple Shortcut Tax plan start-up 
        credit determined under section 45E.''.
            (2) The table of sections for subpart D of part IV of 
        subchapter A of chapter 1 is amended by adding at the end the 
        following new item:

                              ``Sec. 45E. Fair and Simple Shortcut Tax 
                                        plan start-up credit.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.

             TITLE II--PROVISIONS TO SIMPLIFY THE TAX CODE

SEC. 201. REDUCTION IN MARRIAGE PENALTY IN STANDARD DEDUCTION.

    (a) In General.--Section 63(c)(2) (relating to basic standard 
deduction) is amended to read as follows:
            ``(2) Basic standard deduction.--For purposes of paragraph 
        (1), the basic standard deduction is--
                    ``(A) 200 percent of the amount under subparagraph 
                (C) for the taxable year, in the case of a joint return 
                or a surviving spouse (as defined in section 2(a)),
                    ``(B) 150 percent of such amount, in the case of a 
                head of household (as defined in section 2(b)), and
                    ``(C) $3,000, in the case of an individual who is 
                not married and who is not a surviving spouse or head 
                of household or a married individual filing a separate 
                return.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2001.

SEC. 202. ALTERNATIVE MINIMUM TAX EXCLUSION OF SELF-EMPLOYMENT INCOME 
              AND CERTAIN ITEMS OF PREFERENCE AND ADJUSTMENTS.

    (a) Increased Exemption for Self-Employment Income.--Section 
55(d)(1) (relating to exemption amount for taxpayers other than 
corporations) is amended to read as follows:
            ``(1) Exemption amount for taxpayers other than 
        corporations.--In the case of a taxpayer other than a 
        corporation, the term `exemption amount' means the sum of--
                    ``(A) an amount equal to--
                            ``(i) $45,000 in the case of--
                                    ``(I) a joint return, or
                                    ``(II) a surviving spouse,
                            ``(ii) $33,750 in the case of an individual 
                        who--
                                    ``(I) is not a married individual, 
                                or
                                    ``(II) is not a surviving spouse, 
                                and
                            ``(iii) $22,500 in the case of--
                                    ``(I) a married individual who 
                                files a separate return, or
                                    ``(II) an estate or trust, and
                    ``(B) an amount equal to the lesser of--
                            ``(i) the self employment income (as 
                        defined in section 1402(b)) of the taxpayer for 
                        the taxable year, or
                            ``(ii) $1,000,000.
        For purposes of this paragraph, the term `surviving spouse' has 
        the meaning given to such term by section 2(a), and marital 
        status shall be determined under section 7703.''.
    (b) Exclusion of Certain Items of Preference and Adjustments.--
Section 55 (relating to alternative minimum tax imposed) is amended by 
adding at the end the following new subsection:
    ``(f) Special Rule for Small Businesses.--
            ``(1) In general.--For purposes of this part, in computing 
        the alternative minimum taxable income of a taxpayer to which 
        this subsection applies for any taxable year--
                    ``(A) no adjustments provided in section 56 which 
                are attributable to a trade or business of the taxpayer 
                shall be made, and
                    ``(B) taxable income shall not be increased by any 
                item of tax preference described in section 57 which is 
                so attributable.
            ``(2) Application.--
                    ``(A) In general.--This subsection shall apply to a 
                taxpayer for a taxable year if the taxpayer is not a 
                corporation and the gross receipts of the taxpayer for 
                the taxable year from all trades or businesses do not 
                exceed $1,000,000.
                    ``(B) Special rules.--Rules similar to the rules of 
                paragraphs (2), (3)(B), and (3)(C) of section 448(c) 
                shall apply for purposes of this subsection.''.
    (c) Conforming Amendments.--Section 55(d)(3) is amended--
            (1) by striking ``paragraph (1)(A)'' and inserting 
        ``paragraph (1)(A)(i)'' in subparagraph (A),
            (2) by striking ``paragraph (1)(B)'' and inserting 
        ``paragraph (1)(A)(ii)'' in subparagraph (B),
            (3) by striking ``paragraph (1)(C)'' and inserting 
        ``paragraph (1)(A)(iii)'' in subparagraph (C), and
            (4) by striking ``paragraph (1)(C)(i)'' and inserting 
        ``paragraph (1)(A)(iii)(I)'' in the second sentence.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.

SEC. 203. NONREFUNDABLE TAX CREDIT FOR TAX PREPARATION EXPENSES.

    (a) In General.--Subpart A of part IV of subchapter A of chapter 1 
(relating to nonrefundable personal credits) is amended by adding at 
the end the following new section:

``SEC. 25B. TAX PREPARATION EXPENSES.

    ``(a) Allowance of Credit.--In the case of an individual, there 
shall be allowed as a credit against the tax imposed by this chapter 
for the taxable year an amount equal to the lesser of--
            ``(1) 50 percent of the qualified tax preparation expenses 
        of the taxpayer for the taxable year, or
            ``(2) $100.
    ``(b) Qualified Tax Preparation Expenses.--For purposes of this 
section, the term `qualified tax preparation expenses' means expenses 
paid or incurred during the taxable year by an individual in connection 
with the preparation of the taxpayer's Federal income tax return for 
such taxable year, but only if such return is electronically filed. 
Such term shall include any expenses related to an income tax return 
preparer.
    ``(c) Denial of Deduction.--No deduction shall be allowed under 
this chapter for any amount taken into account in determining the 
credit under this section.''.
    (b) Conforming Amendment.--The table of sections for subpart A of 
part IV of subchapter A of chapter 1 is amended by adding at the end 
the following new item:

                              ``Sec. 25B. Tax preparation expenses.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to expenses paid or incurred for taxable years beginning after 
December 31, 2001.

SEC. 204. EXEMPTION OF CERTAIN INTEREST AND DIVIDEND INCOME FROM TAX.

    (a) In General.--Part III of subchapter B of chapter 1 (relating to 
amounts specifically excluded from gross income) is amended by 
inserting after section 115 the following new section:

``SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS AND INTEREST RECEIVED BY 
              INDIVIDUALS.

    ``(a) Exclusion From Gross Income.--In the case of an individual 
who does not have an election in effect under section 60C for the 
taxable year, gross income does not include dividends and interest 
otherwise includible in gross income which are received during the 
taxable year by such individual.
    ``(b) Limitation.--The aggregate amount excluded under subsection 
(a) for any taxable year shall not exceed $500 ($1,000 in the case of a 
joint return).
    ``(c) Certain Dividends Excluded.--Subsection (a) shall not apply 
to any dividend from a corporation which, for the taxable year of the 
corporation in which the distribution is made, or for the next 
preceding taxable year of the corporation, is a corporation exempt from 
tax under section 501 (relating to certain charitable, etc., 
organization) or section 521 (relating to farmers' cooperative 
associations).
    ``(d) Special Rules.--For purposes of this section--
            ``(1) Treatment of certain dividends.--

                                ``For treatment of dividends received 
from regulated investment companies and real estate investment trusts, 
see sections 854(a), 854(b), and 857(c).
            ``(2) Certain nonresident aliens ineligible for 
        exclusion.--In the case of a nonresident alien individual, 
        subsection (a) shall apply only--
                    ``(A) in determining the tax imposed for the 
                taxable year under section 871(b)(1) and only in 
                respect of dividends which are effectively connected 
                with the conduct of a trade or business within the 
                United States, or
                    ``(B) in determining the tax imposed for the 
                taxable year under section 877(b).
            ``(3) Dividends from employee stock ownership plans.--
        Subsection (a) shall not apply to any dividend described in 
        section 404(k).''.
    (b) Conforming Amendments.--
            (1) Subparagraph (C) of section 32(c)(5) is amended by 
        striking ``or'' at the end of clause (i), by striking the 
        period at the end of clause (ii) and inserting ``; or'', and by 
        inserting after clause (ii) the following new clause:
                            ``(iii) interest and dividends received 
                        during the taxable year which are excluded from 
                        gross income under section 116.''.
            (2) Subparagraph (A) of section 32(i)(2) is amended by 
        inserting ``(determined without regard to section 116)'' before 
        the comma.
            (3) Subparagraph (B) of section 86(b)(2) is amended to read 
        as follows:
                    ``(B) increased by the sum of--
                            ``(i) the amount of interest received or 
                        accrued by the taxpayer during the taxable year 
                        which is exempt from tax, and
                            ``(ii) the amount of interest and dividends 
                        received during the taxable year which are 
                        excluded from gross income under section 
                        116.''.
            (4) Subsection (d) of section 135 is amended by 
        redesignating paragraph (4) as paragraph (5) and by inserting 
        after paragraph (3) the following new paragraph:
            ``(4) Coordination with section 116.--This section shall be 
        applied before section 116.''.
            (5)(A) Subsection (a) of section 246A is amended--
                    (i) by inserting ``or the exclusion from gross 
                income under section 116,'' after ``245(a)'' in the 
                matter preceding paragraph (1), and
                    (ii) by inserting ``received by a corporation'' 
                after ``dividend'' in paragraph (1).
            (B) Subsection (e) of section 246A is amended by inserting 
        ``or the exclusion from gross income under section 116'' after 
        ``245''.
            (6) Paragraph (2) of section 265(a) is amended by inserting 
        before the period ``, or to purchase or carry obligations or 
        shares, or to make deposits, to the extent the interest thereon 
        is excludable from gross income under section 116''.
            (7) Subsection (c) of section 584 is amended by adding at 
        the end the following new flush sentence:
``The proportionate share of each participant in the amount of 
dividends or interest received by the common trust fund and to which 
section 116 applies shall be considered for purposes of such section as 
having been received by such participant.''.
            (8) Subsection (a) of section 643 is amended by 
        redesignating paragraph (7) as paragraph (8) and by inserting 
        after paragraph (6) the following new paragraph:
            ``(7) Dividends or interest.--There shall be included the 
        amount of any dividends or interest excluded from gross income 
        under section 116.''.
            (9)(A) Subsection (a) of section 854 is amended by 
        inserting ``section 116 (relating to partial exclusion of 
        dividends and interest received by individuals) and'' after 
        ``For purposes of''.
            (B) Paragraph (1) of section 854(b) is amended--
                    (i) by striking ``subparagraph (A)'' in 
                subparagraph (B) and inserting ``subparagraphs (A) and 
                (B)'',
                    (ii) by redesignating subparagraph (B) as 
                subparagraph (C), and
                    (iii) by inserting after subparagraph (A) the 
                following new subparagraph:
                    ``(B) Exclusion under section 116.--If the 
                aggregate dividends and interest 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.''.
            (C) Paragraph (2) of section 854(b) is amended by inserting 
        ``the exclusion under section 116 and'' after ``for purposes 
        of''.
            (10) Subsection (c) of section 857 is amended to read as 
        follows:
    ``(c) Restrictions Applicable to Dividends Received From Real 
Estate Investment Trusts.--For purposes of section 116 (relating to 
partial exclusion of dividends and interest received by individuals) 
and 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 as a 
dividend.''.
            (11) The table of sections for part III of subchapter B of 
        chapter 1 is amended by inserting after the item relating to 
        section 115 the following new item:

                              ``Sec. 116. Partial exclusion of 
                                        dividends and interest received 
                                        by individuals.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.
                                 <all>