[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[H.R. 2 Introduced in House (IH)]
108th CONGRESS
1st Session
H. R. 2
To amend the Internal Revenue Code of 1986 to provide additional tax
incentives to encourage economic growth.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
February 27, 2003
Mr. Thomas introduced the following bill; which was referred to the
Committee on Ways and Means
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to provide additional tax
incentives to encourage economic growth.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE; REFERENCES; TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``Jobs and Growth
Tax Act of 2003''.
(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.
(c) Table of Contents.--The table of contents of this Act is as
follows:
Sec. 1. Short title; references; table of contents.
TITLE I--ACCELERATION OF CERTAIN PREVIOUSLY ENACTED TAX REDUCTIONS;
INCREASED EXPENSING FOR SMALL BUSINESSES
Sec. 101. Acceleration of 10-percent individual income tax rate bracket
expansion.
Sec. 102. Acceleration of reduction in individual income tax rates.
Sec. 103. Acceleration of 15-percent individual income tax rate bracket
expansion for married taxpayers filing
joint returns.
Sec. 104. Acceleration of increase in standard deduction for married
taxpayers filing joint returns.
Sec. 105. Acceleration of increase in child tax credit.
Sec. 106. Increased expensing for small business.
Sec. 107. Minimum tax relief to individuals.
Sec. 108. Application of EGTRRA sunset to this title.
TITLE II--DIVIDEND EXCLUSION TO ELIMINATE DOUBLE TAXATION OF CORPORATE
EARNINGS
Sec. 201. Dividend exclusion to eliminate double taxation of corporate
earnings.
Sec. 202. Rules for application of dividend exclusion and retained
earnings basis adjustments.
Sec. 203. Treatment of regulated investment companies and real estate
investment trusts.
Sec. 204. Treatment of insurance companies.
Sec. 205. Treatment of S corporations.
Sec. 206. Repeal of accumulated earnings tax and personal holding
company tax.
Sec. 207. Effective dates.
TITLE I--ACCELERATION OF CERTAIN PREVIOUSLY ENACTED TAX REDUCTIONS;
INCREASED EXPENSING FOR SMALL BUSINESSES
SEC. 101. ACCELERATION OF 10-PERCENT INDIVIDUAL INCOME TAX RATE BRACKET
EXPANSION.
(a) In General.--Clause (i) of section 1(i)(1)(B) (relating to the
initial bracket amount) is amended by striking ``($12,000 in the case
of taxable years beginning before January 1, 2008)''.
(b) Inflation Adjustment Beginning in 2003.--Section 1(i)(1)(C)
(relating to inflation adjustment) is amended to read as follows:
``(C) Inflation adjustment.--In prescribing the
tables under subsection (f) which apply with respect to
taxable years beginning in calendar years after 2002--
``(i) the cost-of-living adjustment used in
making adjustments to the initial bracket
amount shall be determined under subsection
(f)(3) by substituting `2001' for `1992' in
subparagraph (B) thereof, and
``(ii) such adjustment shall not apply to
the amount referred to in subparagraph
(B)(iii).
If any amount after adjustment under the preceding
sentence is not a multiple of $50, such amount shall be
rounded to the next lowest multiple of $50.''.
(c) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
(2) Tables for 2003.--The Secretary of the Treasury shall
modify each table which has been prescribed for taxable years
beginning in 2003 and which relates to any amendment made by
this section, section 102, or section 103 to reflect each such
amendment.
SEC. 102. ACCELERATION OF REDUCTION IN INDIVIDUAL INCOME TAX RATES.
(a) In General.--The table in paragraph (2) of section 1(i)
(relating to reductions in rates after June 30, 2001) is amended to
read as follows:
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
``In the case of taxable years The corresponding percentages shall be substituted for the following percentages:
beginning during calendar ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
year: 28% 31% 36% 39.6%
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2001.......................... 27.5% 30.5% 35.5% 39.1%
2002.......................... 27.0% 30.0% 35.0% 38.6%
2003 and thereafter........... 25.0% 28.0% 33.0% 35.0%''.
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2002.
SEC. 103. ACCELERATION OF 15-PERCENT INDIVIDUAL INCOME TAX RATE BRACKET
EXPANSION FOR MARRIED TAXPAYERS FILING JOINT RETURNS.
(a) In General.--Paragraph (8) of section 1(f) (relating to
phaseout of marriage penalty in 15-percent bracket) is amended to read
as follows:
``(8) Elimination of marriage penalty in 15-percent
bracket.--With respect to taxable years beginning after
December 31, 2002, in prescribing the tables under paragraph
(1)--
``(A) the maximum taxable income in the 15 percent
rate bracket in the table contained in subsection (a)
(and the minimum taxable income in the next higher
taxable income bracket in such table) shall be 200
percent of the maximum taxable income in the 15-percent
rate bracket in the table contained in subsection (c)
(after any other adjustment under this subsection), and
``(B) the comparable taxable income amounts in the
table contained in subsection (d) shall be \1/2\ of the
amounts determined under subparagraph (A).''.
(b) Conforming Amendments.--
(1) The heading for subsection (f) of section 1 is amended
by striking ``Phaseout'' and inserting ``Elimination''.
(2) Section 302(c) of the Economic Growth and Tax Relief
Reconciliation Act of 2001 is amended by striking ``2004'' and
inserting ``2002''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
SEC. 104. ACCELERATION OF INCREASE IN STANDARD DEDUCTION FOR MARRIED
TAXPAYERS FILING JOINT RETURNS.
(a) In General.--Paragraph (2) of section 63(c) (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 dollar amount in effect
under subparagraph (C) for the taxable year in the case
of--
``(i) a joint return, or
``(ii) a surviving spouse (as defined in
section 2(a)),
``(B) $4,400 in the case of a head of household (as
defined in section 2(b)), or
``(C) $3,000 in any other case.''.
(b) Conforming Amendments.--
(1) Section 63(c)(4) is amended by striking ``(2)(D)'' each
place it occurs and inserting ``(2)(C)''.
(2) Section 63(c) is amended by striking paragraph (7).
(3) Section 301(d) of the Economic Growth and Tax Relief
Reconciliation Act of 2001 is amended by striking ``2004'' and
inserting ``2002''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
SEC. 105. ACCELERATION OF INCREASE IN CHILD TAX CREDIT.
(a) In General.--Subsection (a) of section 24 (relating to child
tax credit) is amended to read as follows:
``(a) Allowance of Credit.--There shall be allowed as a credit
against the tax imposed by this chapter for the taxable year with
respect to each qualifying child of the taxpayer an amount equal to
$1,000.''.
(b) Advance Payment of Portion of Increased Credit in 2003.--
(1) In general.--Subchapter B of chapter 65 (relating to
abatements, credits, and refunds) is amended by adding at the
end the following new section:
``SEC. 6429. ADVANCE PAYMENT OF PORTION OF INCREASED CHILD CREDIT.
``(a) In General.--Each eligible taxpayer shall be treated as
having made a payment against the tax imposed by chapter 1 for such
taxpayer's first taxable year beginning in 2002 in an amount equal to
the child tax credit refund amount.
``(b) Eligible Taxpayer.--For purposes of this section, the term
`eligible taxpayer' means any taxpayer if--
``(1) such taxpayer was allowed a credit under section 24
for such taxpayer's first taxable year beginning in 2002, and
``(2) at least one qualifying child (as defined in section
24(c)) of the taxpayer for such year meets the age requirement
for 2003.
``(c) Child Tax Credit Refund Amount.--
``(1) In general.--For purposes of this section, the child
tax credit refund amount is equal to the excess (if any) of--
``(A) the amount which would have been allowed as a
credit under section 24 for the taxpayer's first
taxable year beginning in 2002 if--
``(i) the per child amount for such year
were $1,000, and
``(ii) only qualifying children (as defined
in section 24(c)) of the taxpayer for such year
who meet the age requirement for 2003 were
taken into account, over
``(B) the amount which would have been allowed as a
credit under section 24 for the taxpayer's first
taxable year beginning in 2002 if only qualifying
children (as defined in section 24(c)) of the taxpayer
for such year who meet the age requirement for 2003
were taken into account.
``(2) Adjustments.--The amounts described in subparagraphs
(A) and (B) of paragraph (1) shall be determined--
``(A) without regard to section 24(d)(1)(B)(ii),
and
``(B) as if the credit allowed under section 24(d)
were allowed under section 24.
``(d) Age Requirement.--A child of a taxpayer meets the age
requirement for 2003 if such child meets the requirement of section
24(c)(1)(B) for the taxpayer's first taxable year beginning in 2003.
``(e) Timing of Payments.--In the case of any overpayment
attributable to this section, the Secretary shall, subject to the
provisions of this title, refund or credit such overpayment as rapidly
as possible and, to the extent practicable, before December 31, 2003.
``(f) Coordination With Child Tax Credit.--
``(1) In general.--The amount of credit which would (but
for this paragraph) be allowable under section 24 for the
taxpayer's first taxable year beginning in 2003 shall be
reduced (but not below zero) by the aggregate refunds and
credits made or allowed to the taxpayer under this section. Any
failure to so reduce the credit shall be treated as arising out
of a mathematical or clerical error and assessed according to
section 6213(b)(1).
``(2) Joint returns.--In the case of a refund or credit
made or allowed under this section with respect to a joint
return, half of such refund or credit shall be treated as
having been made or allowed to each individual filing such
return.
``(g) No Interest.--No interest shall be allowed on any overpayment
attributable to this section.''.
(2) Clerical amendment.--The table of sections for
subchapter B of chapter 65 is amended by adding at the end the
following new item:
``Sec. 6429. Advance payment of portion of increased child
credit.''.
(c) Effective Dates.--
(1) Subsection (a).--The amendment made by subsection (a)
shall apply to taxable years beginning after December 31, 2002.
(2) Subsection (b).--The amendments made by subsection (b)
shall take effect on the date of the enactment of this Act.
SEC. 106. INCREASED EXPENSING FOR SMALL BUSINESS.
(a) In General.--Paragraph (1) of section 179(b) (relating to
dollar limitation) is amended to read as follows:
``(1) Dollar limitation.--The aggregate cost which may be
taken into account under subsection (a) for any taxable year
shall not exceed $75,000.''.
(b) Increase in Qualifying Investment at Which Phaseout Begins.--
Paragraph (2) of section 179(b) (relating to reduction in limitation)
is amended by striking ``$200,000'' and inserting ``$325,000''.
(c) Off-the-Shelf Computer Software.--Paragraph (1) of section
179(d) (defining section 179 property) is amended to read as follows:
``(1) Section 179 property.--For purposes of this section,
the term `section 179 property' means property--
``(A) which is--
``(i) tangible property (to which section
168 applies), or
``(ii) computer software (as defined in
section 197(e)(3)(B)) which is described in
section 197(e)(3)(A)(i) and to which section
167 applies,
``(B) which is section 1245 property (as defined in
section 1245(a)(3)), and
``(C) which is acquired by purchase for use in the
active conduct of a trade or business.
Such term shall not include any property described in section
50(b) and shall not include air conditioning or heating
units.''.
(d) Adjustment of Dollar Limit and Phaseout Threshold for
Inflation.--Subsection (b) of section 179 (relating to limitations) is
amended by adding at the end the following new paragraph:
``(5) Inflation adjustments.--
``(A) In general.--In the case of any taxable year
beginning in a calendar year after 2003, the dollar
amounts in paragraphs (1) and (2) shall each be
increased by an amount equal to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment
determined under section 1(f)(3) for the
calendar year in which the taxable year begins,
by substituting `calendar year 2002' for
`calendar year 1992' in subparagraph (B)
thereof.
``(B) Rounding.--
``(i) Dollar limitation.--If the amount in
paragraph (1) as increased under subparagraph
(A) is not a multiple of $1,000, such amount
shall be rounded to the nearest multiple of
$1,000.
``(ii) Phaseout amount.--If the amount in
paragraph (2) as increased under subparagraph
(A) is not a multiple of $10,000, such amount
shall be rounded to the nearest multiple of
$10,000.''.
(e) Revocation of Election.--Paragraph (2) of section 179(c)
(relating to election irrevocable) is amended to read as follows:
``(2) Revocation of election.--The taxpayer may revoke an
election under paragraph (1), and any specification contained
in any such election, with respect to any property. Such
revocation, once made, shall be irrevocable.''.
(f) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
SEC. 107. MINIMUM TAX RELIEF TO INDIVIDUALS.
(a) In General.--So much of paragraph (1) of section 55(d)
(relating to exemption amount for taxpayers other than corporations) as
precedes subparagraph (C) thereof 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 as follows:
``(A) Joint return and surviving spouse.--In the
case of a joint return or a surviving spouse, the
amount under the following table:
``In the case of taxable years The exemption amount is:
beginning:
Before 2001........................................ $45,000
In 2001 and 2002................................... $49,000
In 2003, 2004, and 2005............................ $57,000
After 2005......................................... $45,000.
``(B) Individual not married and not a surviving
spouse.--In the case of an individual who is not a
married individual and is not a surviving spouse, the
amount under the following table:
``In the case of taxable years The exemption amount is:
beginning:
Before 2001........................................ $33,750
In 2001 and 2002................................... $35,750
In 2003, 2004, and 2005............................ $39,750
After 2005......................................... $33,750.''.
(b) Conforming Amendments.--
(1) Section 55(d)(1)(C) is amended--
(A) by striking ``, and'' and inserting a period,
and
(B) by striking ``50 percent'' and inserting
``Married individual filing a separate return.--50
percent''.
(2) Section 55(d)(1)(D) is amended by striking ``$22,500''
and inserting ``Estate and trust.--$22,500''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
SEC. 108. APPLICATION OF EGTRRA SUNSET TO THIS TITLE.
Each amendment made by this title (other than section 106) shall be
subject to title IX of the Economic Growth and Tax Relief
Reconciliation Act of 2001 to the same extent and in the same manner as
the provision of such Act to which such amendment relates.
TITLE II--DIVIDEND EXCLUSION TO ELIMINATE DOUBLE TAXATION OF CORPORATE
EARNINGS
SEC. 201. DIVIDEND EXCLUSION TO ELIMINATE DOUBLE TAXATION OF CORPORATE
EARNINGS.
(a) In General.--Part III of subchapter B of chapter 1 is amended
by inserting after section 115 the following new section:
``SEC. 116. DIVIDEND EXCLUSION TO ELIMINATE DOUBLE TAXATION OF
CORPORATE EARNINGS.
``(a) Exclusion.--Gross income does not include the excludable
portion (as defined in section 281) of any amount received as a
dividend.
``(b) Comparable Treatment for Retained Earnings.--If the
excludable dividend amount (as defined in section 281) of any
corporation for any calendar year exceeds the dividends paid by the
corporation in such calendar year, the basis of stock in the
corporation shall be increased in the manner and to the extent
provided in section 282.
``(c) Reporting to Shareholders.--For reporting to shareholders,
see section 6042.''
(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:
``Sec. 116. Dividend exclusion to
eliminate double taxation of
corporate earnings.''
SEC. 202. RULES FOR APPLICATION OF DIVIDEND EXCLUSION AND RETAINED
EARNINGS BASIS ADJUSTMENTS.
(a) In General.--Subchapter B of chapter 1 (as amended by
subsection (d)) is amended by inserting after part IX the following new
part:
``PART X--RULES FOR APPLICATION OF DIVIDEND EXCLUSION AND RETAINED
EARNINGS BASIS ADJUSTMENTS.
``Sec. 281. Excludable portion of
dividends.
``Sec. 282. Retained earnings basis
adjustments.
``Sec. 283. Treatment of distributions
after previous retained
earnings basis adjustments.
``Sec. 284. Special rules for credits and
refunds.
``Sec. 285. Special rules for foreign
corporations and shareholders.
``Sec. 286. Other special rules.
``Sec. 287. Regulations.
``SEC. 281. EXCLUDABLE PORTION OF DIVIDENDS.
``(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.
``(b) Excludable Dividend Amount.--For purposes of this part and
section 116--
``(1) In general.--The term `excludable dividend amount'
means, with respect to any corporation for any calendar year,
the excess of--
``(A) the sum of--
``(i) the fully taxed earnings amount for
the preceding calendar year,
``(ii) the aggregate amount of dividends
received by the corporation during such
preceding year which are excluded from gross
income under section 116(a), and
``(iii) the aggregate amount of increases
during such preceding year under section 116(b)
in the basis of stock held by the corporation,
over
``(B) the amount of applicable income tax taken
into account under subparagraph (A)(i).
``(2) Carryover of excess of excludable dividend amount
over earnings and profits.--The excludable dividend amount of a
corporation for any calendar year shall be increased by the
excess of--
``(A) the excludable dividend amount of such
corporation for the preceding calendar year, over
``(B) the maximum amount which could have been paid
by the corporation as dividends during such preceding
calendar year.
``(c) Fully Taxed Earnings Amount.--
``(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.
``(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.
``(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.
``(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.
``(d) Definitions.--For purposes of this part--
``(1) Applicable income tax.--
``(A) In general.--The term `applicable income tax'
means the excess (if any) of--
``(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
``(ii) the sum of the credits under part IV
of subchapter A (other than subpart C and
section 27(a)).
``(B) Transitional rules.--
``(i) In general.--Such term shall not
include any tax imposed for any taxable year
ending before April 1, 2001.
``(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.
``(iii) Section 1374.--The reference to
section 1374 in subparagraph (A)(i) shall not
apply to taxable years beginning before January
1, 2003.
``(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 30, 2001, and
beginning before January 1, 2003.
``(2) Applicable return.--
``(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 8th month following the close of such
taxable year occurs during such calendar year.
``(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.
``SEC. 282. RETAINED EARNINGS BASIS ADJUSTMENTS.
``(a) In General.--If any portion of the excess described in
section 116(b) is allocated to a share of stock in a corporation under
subsection (b), the basis of such share shall be increased by the
amount so allocated.
``(b) Allocation of Excess.--
``(1) In general.--A corporation may allocate the excess
described in section 116(b) for any calendar year to shares of
stock in the corporation at 1 or more times during the calendar
year to the extent that cash in the amount of such excess, if
distributed at the time of such allocation, would be a
dividend.
``(2) Manner.--Except as provided in regulations prescribed
by the Secretary, any amount allocated under paragraph (1)
shall be allocated in the same manner as if cash in such amount
were actually distributed as dividends. No allocation shall be
effective before the date on which it is made by the
corporation.
``(3) Exception for certain preferred stock.--No amount may
be allocated under this subsection to stock described in
section 1504(a)(4) (determined without regard to subparagraph
(A) thereof).
``(c) Effect on Earnings and Profits.--Earnings and profits of a
corporation making an allocation under subsection (b), and of a
corporation receiving such an allocation, shall be adjusted in the same
manner as if the allocation were treated as a dividend.
``(d) Authority to Allow Carryover of Unallocated Excess Excludable
Dividend Amount.--Notwithstanding section 281, the Secretary may by
regulation allow a corporation to increase the excludable dividend
amount for any calendar year by the amount of the excess described in
section 116(b) for the preceding calendar year which is not allocated
under subsection (b).
``SEC. 283. TREATMENT OF DISTRIBUTIONS AFTER PREVIOUS RETAINED EARNINGS
BASIS ADJUSTMENTS.
``(a) Treatment of Distributions.--
``(1) In general.--If a corporation makes distributions
described in section 301(a) with respect to any class of stock
in any calendar year which are not excludable under section
116(a), such distributions shall not be treated as dividends
(and paragraphs (2) and (3) of section 301(c) shall apply to
such distributions) to the extent such distributions do not
exceed the corporation's cumulative retained earnings basis
adjustment amount for such class as of the beginning of such
year. If such distributions exceed such amount, this paragraph
shall be applied to a proportionate share of each such
distribution.
``(2) Special rules for recharacterized dividends.--If any
dividend (determined without regard to this subsection) during
any calendar year with respect to any class of stock in a
corporation is treated as a distribution other than a dividend
under paragraph (1), such treatment shall be disregarded for
purposes of--
``(A) determining the excludable portion under
section 281 of dividends paid by the corporation during
the calendar year, and
``(B) determining whether any distribution during
the calendar year with respect to stock in the
corporation is treated as a dividend.
``(b) Cumulative Retained Earnings Basis Adjustment Amount.--For
purposes of this section, the term `cumulative retained earnings basis
adjustment amount' means, with respect to any class of stock for any
calendar year, the excess (if any) of--
``(1) the aggregate of the excess described in section
116(b) allocated to shares of such class of stock under section
282 for all preceding calendar years, over
``(2) the aggregate amount of distributions to which
subsection (a)(1) applies with respect to such class of stock
for all preceding calendar years.
``SEC. 284. SPECIAL RULES FOR CREDITS AND REFUNDS.
``(a) In General.--No overpayment of an applicable income tax may
be allowed as a credit or refund to the extent that the overpayment
exceeds the sum of--
``(1) the aggregate applicable income taxes for the
calendar year in which the credit or refund would otherwise be
allowed or made, and
``(2) an amount equal to the lesser of--
``(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
``(B) the amount specified by the corporation for
purposes of this paragraph.
``(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--
``(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
``(2) the excludable dividend amount for the calendar year
shall be reduced by the excess of--
``(A) the amount determined under subsection (a)(2)
divided by the highest rate of tax specified in section
11, over
``(B) the amount determined under subsection
(a)(2).
``(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.
``(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).
``(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.
``SEC. 285. SPECIAL RULES FOR FOREIGN CORPORATIONS AND SHAREHOLDERS.
``(a) Computation of Excludable Dividend Amounts of Foreign
Corporations.--
``(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--
``(A) the taxes imposed by section 884 (relating to
branch profits tax), and
``(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 or are
attributable to distributions which are described in
section 283(a).
``(2) Treatment of disallowed exclusions and adjustments.--
Notwithstanding subsection (b)--
``(A) the excludable dividend amount of a foreign
corporation for a calendar year shall be increased by--
``(i) the dividends received by the
corporation which (but for subsection (b))
would be excludable under section 116(a), and
``(ii) the distributions received by such
corporation during such year which are
described in section 283(a), and
``(B) the earnings and profits of a foreign
corporation--
``(i) shall be increased by the amount
described in subparagraph (A)(ii), and
``(ii) shall not be increased by any excess
described in section 116(b) allocated to such
corporation for which an increase in basis is
not allowed by reason of subsection (b)(2).
``(b) Taxation of Foreign Shareholders.--In the case of a
shareholder who is a nonresident alien individual or a foreign
corporation--
``(1) no dividends shall be excludable under section
116(a),
``(2) there shall be no increase in basis for any excess
described in section 116(b) allocated to such individual or
corporation under section 282, and
``(3) any distribution described in section 283 shall be
treated as a dividend for purposes of sections 871 and 881 and
chapter 3.
``(c) Rules Relating to Foreign Tax Credit.--
``(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 and any distribution described in section 283(a).
``(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.
``SEC. 286. OTHER SPECIAL RULES.
``(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 for the calendar year, and the cumulative retained
earnings basis adjustment amount as of the beginning of the calendar
year in which the distribution is made, shall be reduced by the ratable
share of such amounts attributable to the stock so redeemed.
``(b) Coordination With Section 246(c).--
``(1) Holding period requirements.--If a shareholder
disposes of any share of stock before the holding period
requirements of section 246(c) are met--
``(A) 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), and
``(B) there shall be no increase in basis for any
excess described in section 116(b) allocated to the
shareholder of such stock under section 282.
``(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) or basis increase under section 116(b)
with respect to any share of stock to the extent that such
payments do not exceed the amount of such dividend or basis
increase.
``(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--
``(A) the dividends received by the corporation
which are excludable under section 116(a) and which
resulted in a basis reduction under paragraph (1)(A),
and
``(B) the aggregate increases in basis which (but
for paragraph (1)(B)) would be made in stock held by
the corporation.
``(c) Treatment of Regulated Investment Companies and Real Estate
Investment Trusts.--
``(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.
``(2) Cross reference.--
``For special rules relating to
application of this part to regulated investment companies and real
estate investment trusts, see section 852(g).
``(d) Exclusion and Basis Allocation Reduced Where Portfolio Stock
Held by Corporation is Debt-Financed.--
``(1) Treatment of excludable dividend.--In the case of any
debt-financed portfolio stock (within the meaning of section
246A), 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--
``(A) the amount which would be excluded under
section 116(a) without regard to this paragraph, and
``(B) 100 percent minus the average indebtedness
percentage (within the meaning of section 246A(d)).
``(2) Treatment of basis increase.--In the case of any
debt-financed portfolio stock (within the meaning of section
246A) with respect to which there is an increase in basis under
section 116(b) during any taxable year, the gross income of the
taxpayer shall be increased by an amount equal to the product
of--
``(A) the amount of the increase under section
116(b), and
``(B) the average indebtedness percentage (within
the meaning of section 246A(d)).
``(3) Limitation.--The aggregate amount of reductions under
paragraph (1) and increases in gross income under paragraph
(2) 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.
``(4) Treatment of increase in gross income.--The
excludable dividend amount of a corporation for a calendar year
shall not be increased by reason of any increase in gross
income under paragraph (2).
``(5) Exception.--This subsection shall not apply to any
dividend described in paragraph (1) or (2) of section 246A(b).
``(e) Cooperatives.--In the case of a cooperative to which
subchapter T applies--
``(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
``(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) or for any distribution
described in section 283(a) which reduced the basis of stock
held by the cooperative under section 301(c)(2).
``(f) 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, and any stock with respect to which such a
dividend may be paid shall not be taken into account in making any
allocation under 282 or any distribution described in section 283(a).
``SEC. 287. REGULATIONS.
``The Secretary shall prescribe such regulations as may be
appropriate to carry out section 116 and this part, including
regulations--
``(1) providing for the treatment of options and
convertible debt as stock, including modification of the
attribution rules under section 318(a)(4),
``(2) providing for the allocation of the excludable
dividend amount and the cumulative retained earnings basis
adjustment amount in the case of transactions described in
section 312(h),
``(3) waiving the application of section 246(c)(4) for
purposes of sections 286(b) and 1059(g),
``(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--
``(A) activities of lower-tier members of the
group,
``(B) dividends excludable under section 116(a)
received from such lower-tier members, and
``(C) increases in basis allocated under section
282 to stock in such lower-tier members,
``(5) providing for the application of section 116 and this
part in the case of pass-thru entities, including appropriate
adjustments to basis, and
``(6) as are necessary to further the purposes of section
116 and this part and to prevent the circumvention of such
purposes.
Any regulations under paragraph (4) may be effective as of the
effective date of this part.''
(b) Reporting of Excludable Dividends and Retained Earnings Basis
Adjustments.--
(1) In general.--Section 6042(a) (relating to returns
regarding payments of dividends and corporate earnings and
profits) is amended to read as follows:
``(a) Requirement of Reporting.--
``(1) In general.--Every person--
``(A) who makes payments of dividends aggregating
$10 or more to any other person during any calendar
year,
``(B) who allocates under section 282 increases in
basis of stock in a corporation aggregating $10 or more
to any other person during any calendar year,
``(C) who makes distributions described in section
283(a) aggregating $10 or more to any other person
during any calendar year, or
``(D) who receives such payments of dividends,
allocations of increases in basis, or distributions as
a nominee and who makes payments or allocates increases
aggregating $10 or more during any calendar year to any
other person with respect to the dividends,
allocations, or distributions received,
shall make a return at the time and in the manner prescribed by
the Secretary, setting forth the information described in
paragraph (3).
``(2) Returns required by secretary.--Every person who
makes payments of dividends, allocations under section 282, or
distributions described in section 283(a) to which paragraph
(1) does not apply shall, when required by the Secretary, make
a return setting forth the information described in paragraph (3).
``(3) Information reported.--Information described in this
paragraph includes--
``(A) the aggregate amount of dividends, including
the portion of such amount excludable from gross income
under section 116(a),
``(B) the amount of each allocation of basis under
section 282 with respect to each share of stock and the
date of such increase,
``(C) the amount of each distribution described in
section 283(a), including the portion of such amount to
which paragraph (2) or (3) of section 301(c) applies
and the date of such distribution, and
``(D) such other information as the Secretary may
require.
In the case of a nominee described in paragraph (1)(D), this
paragraph shall apply with respect to the payments and
allocations made by the nominee.''
(2) Application to foreign persons.--Section 6042 is
amended by adding at the end the following new subsection:
``(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.''
(3) Conforming amendments.--
(A) Section 6042(b)(3) is amended by striking ``or
(B)'' and inserting ``or (D)''.
(B) Section 6042(c)(2) is amended to read as
follows:
``(2) the information described in subsection (a)(3)
required to be shown on the return.''
(c) Amendments to Other Sections.--
(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''.
(2) Coordination with dividend received deductions.--
(A) Section 246 is amended by adding at the end the
following new subsection:
``(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 285(b)(1) and 286(d).''
(B) Section 243 is amended by adding at the end the
following new subsection:
``(f) Termination.--Paragraph (1) of subsection (a) shall not apply
to any dividend--
``(1) paid from earnings and profits accumulated in taxable
years ending after April 1, 2001,
``(2) made with respect to stock issued after February 2,
2003, or
``(3) received by a corporation after December 31, 2005.''
(3) Carryovers in certain corporation acquisitions.--
Section 381(c) is amended by adding at the end the following
new paragraph:
``(27) EDA and crebaa.--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 and the cumulative
retained earnings basis adjustment amount in respect of the
distributor or transferor.''
(4) Trusts and estates.--Subsection (a) of section 643 is
amended--
(A) by redesignating paragraph (7) as paragraph (8)
and by inserting after paragraph (6) the following new
paragraph:
``(7) Dividends, etc.--There shall be included the amount
of any dividends excluded from gross income under section 116
and the amount of any distribution described in section 283.'',
and
(B) by striking ``and (6)'' in the last sentence
and inserting ``, (6), and (7)''.
(5) Partnerships.--
(A) Paragraph (5) of section 702(a) is amended to
read as follows:
``(5) dividends with respect to which there is an exclusion
under section 116 or a deduction under part VIII of subchapter
B,''.
(B) Section 705(a)(1) is amended by striking
``and'' at the end of subparagraph (B), by striking the
semicolon at the end of subparagraph (C) and inserting
``, and'', and by adding at the end the following new
subparagraph:
``(D) increases in basis under section 116(b)
allocated to the partnership;''.
(6) Extraordinary dividends.--
(A) In general.--Section 1059 is amended by
redesignating subsection (g) as subsection (h) and by
inserting after subsection (f) the following new subsection:
``(g) Treatment of Excludable Dividends and Retained Earnings Basis
Adjustments as Extraordinary Dividends.--
``(1) In general.--For purposes of this section, any
dividend excludable under section 116(a) or increase in basis
under section 116(b) 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.
``(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--
``(A) the dividends received by the corporation
which are treated as extraordinary dividends by reason
of paragraph (1), and
``(B) the aggregate increases in basis under
section 116(b) which are so treated.
``(3) Regulations.--The Secretary may by regulation provide
for exceptions to the application of paragraph (1).''
(B) Paragraph (3) of section 1059(d) is amended by
inserting ``section 1223(11) shall not apply and''
after ``subsection (a),''.
(C)(i) Section 1059 is amended by striking
``corporation'' each place it appears in subsection (a)
and inserting ``taxpayer''.
(ii) The section heading for section 1059 is
amended by striking ``corporate'' and by inserting
``and excludable'' before ``dividends''.
(iii) The item relating to section 1059 in the
table of sections for part IV of subchapter O of
chapter 1 is amended by striking ``corporate'' and by
inserting ``and excludable'' before ``dividends''.
(7) Private foundations.--Section 4940(c) is amended by
adding at the end the following new paragraph:
``(6) Coordination with dividend exclusion.--For purposes
of this section, gross investment income shall not include--
``(A) a dividend to the extent excluded from gross
income under section 116(a), and
``(B) a distribution described in section 283.''
(d) Conforming Amendments.--
(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.
(B) Section 281, as so in effect, is redesignated as
section 296.
(C) The table of sections for such part XII, as so
designated, is amended by striking ``Sec. 281'' and inserting
``Sec. 296.''
(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:
``Part X. Rules for application of
dividend exclusion and retained
earnings basis adjustments.
``Part XI. Special rules relating to
corporate preference items.
``Part XII. Terminal railroad
corporations and their
shareholders.''
(2) Subsection (f) of section 301 is amended by adding at
the end the following new paragraph:
``(4) For exclusion from gross income of certain dividends,
see section 116.''
SEC. 203. TREATMENT OF REGULATED INVESTMENT COMPANIES AND REAL ESTATE
INVESTMENT TRUSTS.
(a) In General.--Section 852 is amended by adding at the end the
following new subsection:
``(g) Special Rules Relating to Section 116 and Part X of
Subchapter B.--
``(1) Excludable portion.--
``(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.
``(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).
``(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.
``(D) Coordination with section 853.--The election
under section 853 shall not apply to dividends
excludable under section 116 and distributions
described in section 283(a) received by a qualified
investment entity.
``(2) Retained earnings basis adjustments.--
``(A) In general.--A qualified investment entity
may allocate any increase in basis allocated to the
entity under section 282 to shares of stock in the
entity at 1 or more times during the taxable year in
the manner and the time prescribed in paragraphs (2)
and (3) of section 282(b).
``(B) Designation.--For purposes of section 116(b),
the increase in basis allocated to any share of stock
in the 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 allocation is made.
``(C) Limitation.--Rules similar to the rules of
paragraph (1)(B) shall apply to amounts allocated under
this paragraph.
``(D) Shareholder treatment of amounts
designated.--Shareholders of such entity who receive an
allocation under this paragraph from such entity shall
take into account such allocation as if it were an
allocation under section 282.
``(E) Earnings and profits.--Earnings and profits
of the entity making such an allocation shall be
adjusted in the same manner as provided in section
282(c).
``(3) Certain distributions after previous retained
earnings basis adjustments.--
``(A) In general.--If any qualified investment
entity receives during any taxable year distributions
described in section 283(a) which reduced the basis of
stock held by such entity under section 301(c)(2), the
entity may designate any distributions described in
section 301(a) made by such entity in such taxable year
which are not excludable under section 116(a) (after
the application of paragraph (1)) as distributions
described in section 283(a). Such designations shall be
made in a written notice mailed to its shareholders not
later than 60 days after the close of its taxable year
in which such distribution is made.
``(B) Limitation.--If the aggregate amount so
designated with respect to a taxable year (including
distributions paid after the close of the taxable year
as provided in section 855(e)) exceeds the aggregate
distributions described in section 283(a) which reduced
the basis of stock held by such entity under section
301(c)(2) for such taxable year, then the amount of a
distribution otherwise treated as a distribution
described in section 283(a) by reason of a designation
under subparagraph (A) shall be reduced by an amount
which bears the same ratio to the amount otherwise so
treated as such excess bears to the total amount
designated under subparagraph (A).
``(C) Shareholder treatment of amounts
designated.--Shareholders of such entity who receive a
distribution from such entity which is designated under
this paragraph shall treat such distribution as a
distribution described in section 283(a).
``(D) Treatment of capital gain and exempt-interest
dividends.--Any distribution designated under
subparagraph (A) may not be treated as a capital gain
dividend or an exempt-interest dividend.
``(E) Adjustments.--No adjustment shall be made in
the earnings and profits of a qualified investment
entity with respect to a distribution by such entity
which is designated under subparagraph (A).
``(4) Coordination with dividends paid deduction.--No
allocation or distribution designated under paragraph (2) or
(3) shall be treated as a dividend for purposes of section 561.
``(5) Definitions.--For purposes of this subsection--
``(A) Qualified investment entity.--The term
`qualified investment entity' means--
``(i) a regulated investment company, and
``(ii) a real estate investment trust.
``(B) Exempt-interest dividend.--The term `exempt-
interest dividend' has the meaning given to such term
by subsection (b)(5).''
(b) Other Rules Relating to Regulated Investment Companies.--
(1) Distribution requirements.--
(A) Clause (i) of section 852(a)(1)(B) is amended
by inserting ``and its dividend income excludable under
section 116(a),'' before ``over''.
(B) Section 852(a) is amended by striking ``and''
at the end of paragraph (1), by redesignating paragraph
(2) as paragraph (3), and by inserting after paragraph
(1) the following new paragraph:
``(2) 90 percent of the distributions described in section
283(a)--
``(A) which are received by such company during the
taxable year, and
``(B) which reduce under section 301(c)(2) the
basis of stock held by such company,
are distributed during such year under subsection (g)(3)(A),
and''.
(C) Section 855 is amended by adding at the end the
following new subsection:
``(e) Distribution of Previously Retained Earnings Basis
Adjustments.--Rules similar to the rules of the preceding provisions of
this section shall apply to distributions described in section
852(g)(3)(A).''
(2) Taxation of entity and shareholders.--
(A) The material following paragraph (3) of section
851(b) is amended--
(i) by inserting ``, dividends excludable
from gross income under section 116(a), and
distributions described in section 283(a) which
reduce the basis of stock under section
301(c)(2)'' after ``103(a)'' in the third
sentence, and
(ii) by adding at the end the following new
sentence: ``For purposes of paragraph (2),
distributions described in section 283(a) which
reduce the basis of stock under section
301(c)(2) shall be treated as dividends.''
(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)''.
(C) Subparagraph (B) of section 852(b)(4) is
amended to read as follows:
``(B) Loss attributable to exempt dividends.--If--
``(i) a shareholder of a regulated
investment company receives an exempt-interest
dividend, a dividend excludable under section
116(a), or an allocation under subsection
(g)(2), with respect to any share, and
``(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 and allocations, be disallowed.''
(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:
``(C) any dividend excludable from gross income
under section 116(a).''
(c) Other Rules Relating to Real Estate Investment Trusts.--
(1) Distribution requirements.--
(A) 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:
``(iii) 90 percent of its dividend income
excludable under section 116(a); minus''
(B) Subsection (a) of section 857 is amended by
redesignating paragraph (2) as paragraph (3) and by
inserting after paragraph (1) the following new
paragraph:
``(2) 90 percent of the distributions described in section
283(a)--
``(A) which are received by such trust during the
taxable year, and
``(B) which reduce under section 301(c)(2) the
basis of stock held by such trust,
are distributed during such year under subsection (g)(3)(A);
and''.
(C) Section 858 is amended by adding at the end the
following new subsection:
``(d) Distribution of Previously Retained Earnings Basis
Adjustments.--Rules similar to the rules of the preceding provisions of
this section shall apply to distributions described in section
852(g)(3).''
(2) Taxation of entity and shareholders.--
(A)(i) Section 856(c)(2) is amended--
(I) by inserting ``(including dividends
excludable from gross income under section
116(a)) and distributions described in section
283(a) which reduce the basis of stock under
section 301(c)(2)'' after ``dividends'' in
subparagraph (A), and
(II) by inserting ``(including tax-exempt
interest)'' after ``interest'' in subparagraph
(B).
(ii) Section 856(c) is amended by adding at the end
the following new paragraph:
``(8) Gross income tests.--For purposes of paragraphs (2)
and (3), gross income shall be treated as including tax-exempt
interest, dividends excludable from gross income under section
116(a), and distributions described in section 283(a) which
reduce the basis of stock under section 301(c)(2).''
(B) Section 857(b)(2)(B) is amended by inserting ``
or any dividends paid which are excludable under
section 116(a)'' after ``subparagraph (D)''.
(C) Section 857(b) is amended by adding at the end
the following new paragraph:
``(10) Loss attributable to exempt dividends.--If--
``(A) a shareholder of a real estate investment
trust receives a dividend excludable under section
116(a) or an allocation under section 852(g)(2) with
respect to any share, and
``(B) 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 and
allocations, be disallowed.''
(D) Subsection (g) of section 857 is amended to
read as follows:
``(g) Cross References.--
``(1) For provisions relating to excise tax based on
certain real estate investment trust taxable income not
distributed during the taxable year, see section 4981.
``(2) For special rules relating to application of dividend
exclusion and retained earnings basis adjustments, see section
852(g).''
(E) 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:
``(C) any dividend excludable from gross income
under section 116(a).''
SEC. 204. TREATMENT OF INSURANCE COMPANIES.
(a) Life Insurance Companies.--
(1) Section 803 is amended by adding at the end the
following new subsection:
``(c) Special Rules for Excludable Dividends and Retained Earnings
Basis Adjustments.--
``(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.
``(2) Retained earnings basis adjustments.--In the case of
any increase in basis under section 116(b) allocated under
section 282 to stock held by a life insurance company--
``(A) the life insurance company's and
policyholders' shares of such allocation shall be
determined in accordance with section 812 in the same
manner as if it were a dividend, and
``(B) life insurance company gross income of such
company shall be increased by the policyholders' share
of such allocation.
``(3) 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,
or any increase in basis under section 116(b), with respect to
such stock were 100 percent.
``(4) Computation of excludable dividend amount.--In the
case of a life insurance company, the increase under clause
(ii) or (iii) 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 or
increases in basis described in either such clause.''
(2) Section 812(d)(1)(A) is amended by inserting
``(including dividends excludable under section 116(a))'' after
``dividends''.
(3) Section 815(c)(2)(A)(iii) is amended by adding ``,the
amount of dividends excludable under section 116(a) (as
modified by section 803(c)(1)), and the amount of basis
increase under section 116(b) (as modified by section
803(c)(2))'' after ``section 103''.
(b) Other Insurance Companies.--
(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:
``(iv) any dividend excludable under
section 116(a) which is received during such
taxable year and any increase in basis under
section 116(b) which is allocated under section
282 to such company during such taxable year.''
(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:
``(14) the amount of dividends received during the taxable
year which are excluded from gross income under section
116(a).''
(3) Section 833(b)(3)(E) is amended--
(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:
``(iii) the aggregate amount excluded for
the taxable year under section 116(a).'', and
(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).''
(4) Section 834(c) is amended by adding at the end the
following new paragraph:
``(10) Excludable dividends.--The amount of dividends
received during the taxable year which are excluded from gross
income under section 116(a).''
SEC. 205. TREATMENT OF S CORPORATIONS.
(a) Basis Adjustments Relating to Dividends.--Section 1367(a)(1) is
amended by striking ``and'' at the end of subparagraph (B), by striking
the period at the end of subparagraph (C) and inserting ``, and'', and
by adding at the end the following new subparagraph:
``(D) increases in basis under section 116(b)
allocated to the S corporation.''.
(b) 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:
``(f) Coordination with Dividend Exclusion and Retained Earnings
Basis Adjustments.--
``(1) Determination of excluded dividends amount.--
``(A) In general.--Clauses (ii) and (iii) 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.
``(B) Cross reference.--
``For treatment of taxes imposed by
section 1374, see section 281(d)(1).
``(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) and any distribution described in section
283(a).''
(c) Modification to Treatment of Section 1374 Tax.--
(1) Paragraph (2) of section 1366(f) is amended to read as
follows:
``(2) Treatment of tax imposed on 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.''
(2)(A) Subsection (c) of section 1371 is amended by adding
at the end the following new paragraph:
``(B) Earnings and profits.--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).''
(B) Paragraph (1) of section 1371(c) is amended by striking
``and (3)'' and inserting ``, (3), and (4)''.
(d) Repeal of Tax and Termination Where Excess Passive Investment
Income.--
(1) Repeal of tax.--
(A) In general.--Section 1375 is repealed.
(B) Conforming amendments.--Sections 26(b)(2)(J)
and 1366(f)(3) are repealed.
(2) Repeal of termination.--Section 1362(d) is amended by
striking paragraph (3).
SEC. 206. REPEAL OF ACCUMULATED EARNINGS TAX AND PERSONAL HOLDING
COMPANY TAX.
(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.
(b) Conforming Amendments.--
(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.
(2) Section 26(b)(2) is amended by striking subparagraphs
(F) and (G).
(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).
(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).
(5) Section 56(b)(2) is amended by striking subparagraph
(C) and by redesignating subparagraph (D) as subparagraph (C).
(6) Section 111 is amended by striking subsection (d).
(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).
(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.
(9)(A) Section 316(b) is amended by striking paragraph (2)
and by redesignating paragraph (3) as paragraph (2).
(B) Section 331(b) is amended by striking ``(other than a
distribution referred to in paragraph (2)(B) of section
316(b))''.
(10) Section 341(d) is amended--
(A) by striking ``section 544(a) (relating to
personal holding companies)'' and inserting ``section
465(f) (relating to constructive ownership rules)'',
and
(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'''.
(11) Section 381(c) is amended by striking paragraphs (14)
and (17).
(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.
(13) Section 447(g)(4)(A) is amended by striking ``other
than--'' and all that follows and inserting ``other than an S
corporation.''
(14)(A) Section 465(a)(1)(B) is amended to read as follows:
``(B) a C corporation which is closely held,''.
(B) Section 465(a)(3) is amended to read as follows:
``(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.''
(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.
(D) Section 465(c)(7)(G) is amended to read as follows:
``(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)).''
(E) Section 465 is amended by adding at the end the
following new subsection:
``(f) Constructive Ownership Rules.--For purposes of subsection
(a)(3)--
``(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.
``(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.
``(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.
``(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).
``(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.
``(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).
``(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.''
(15)(A) Section 553(a)(1) is amended by striking ``section
543(d)'' and inserting ``subsection (c)''.
(B) Section 553 is amended by adding at the end the
following new subsection:
``(c) Active Business Computer Software Royalties.--
``(1) In general.--For purposes of subsection (a), the term
`active business computer software royalties' means any
royalties--
``(A) received by any corporation during the
taxable year in connection with the licensing of
computer software, and
``(B) with respect to which the requirements of
paragraphs (2), (3), and (4) are met.
``(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)--
``(A) are received by a corporation engaged in the
active conduct of the trade or business of developing,
manufacturing, or producing computer software, and
``(B) are attributable to computer software which--
``(i) is developed, manufactured, or
produced by such corporation (or its
predecessor) in connection with the trade or
business described in subparagraph (A), or
``(ii) is directly related to such trade or
business.
``(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.
``(4) Deductions under sections 162 and 174 relating to
royalties must equal or exceed 25 percent of ordinary gross
income.--
``(A) In general.--The requirements of this
paragraph are met if--
``(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
``(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.
``(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.
``(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.''
(16) Section 556(b)(1) is amended by striking ``, but not
including'' and all that follows and inserting a period.
(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.
(18) Section 562(b) is amended to read as follows:
``(b) Distributions in Liquidation.--Except in the case of a
foreign personal holding company described in section 552--
``(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
``(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.
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.''
(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).
(20) Section 564 is hereby repealed.
(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).''.
(22) Section 852(b)(1) is amended by striking ``which is a
personal holding company (as defined in section 542) or''.
(23)(A) Section 856(h)(1) is amended to read as follows:
``(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.''.
(B) Section 856(h)(3)(A)(i) is amended by striking
``section 542(a)(2)'' and inserting ``section 465(a)(3)''.
(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.
(D) Subparagraph (C) of section 856(h)(3), as redesignated
by the preceding subparagraph, is amended by striking
``subparagraph (C)'' and inserting ``subparagraph (B)''.
(24) The last sentence of section 882(c)(2) is amended to
read as follows:
``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.''.
(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).
(26) Section 936 is amended by striking subsection (g).
(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.
(28) Section 992 is amended by striking subsection (e).
(29) Section 1202(e)(8) is amended by striking ``section
543(d)(1)'' and inserting ``section 553(c)(1)''.
(30) Section 1298(b) is amended by striking paragraph (8)
and redesignating paragraph (9) as paragraph (8).
(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).
(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.''.
(B) The section heading for section 1551 is amended by
striking ``and accumulated earnings credit''.
(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''.
(33)(A) Section 1561(a) is amended--
(i) by striking paragraph (2),
(ii) by redesignating paragraphs (3) and (4) as
paragraphs (2) and (3),
(iii) by striking ``paragraph (3)'' each place it
appears and inserting ``paragraph (2)'',
(iv) by striking ``paragraph (4)'' and inserting
``paragraph (3)'', and
(v) by striking the third sentence.
(B) Section 1561(b) is amended to read as follows:
``(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.''.
(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.''
(35) Sections 6422 is amended by striking paragraph (3) and
by redesignating paragraphs (4) through (12) and paragraphs (3)
through (11), respectively.
(36) Section 6501 is amended by striking subsection (f).
(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.
(38) Section 6515 is amended by striking paragraph (1) and
by redesignating paragraphs (2) through (6) as paragraphs (1)
through (5), respectively.
(39) Section 6601(b) is amended by striking paragraph (4)
and redesignating paragraph (5) as paragraph (4).
(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)''.
(41) Section 6683 is hereby repealed.
(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).
(c) Clerical Amendments.--
(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.
(2) The table of sections for part IV of such subchapter G
is amended by striking the item relating to section 564.
(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.
SEC. 207. EFFECTIVE DATES.
(a) In General.--Except as otherwise provided in this section, the
amendments made by this title shall apply to distributions received,
and basis allocations made under section 282 of the Internal Revenue
Code of 1986 (as added by this title), after December 31, 2002.
(b) Special Rules.--
(1) Section 1374 tax.--In applying the amendments made by
this title, 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.
(2) Section 205(d) and 206.--The amendments made by
sections 205(d) and 206 shall apply to taxable years beginning
after December 31, 2002; except that--
(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,
2003, and
(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, 2003.
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.
<all>