[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 2 Introduced in Senate (IS)]







108th CONGRESS
  1st Session
                                  S. 2

 To amend the Internal Revenue Code of 1986 to provide additional tax 
                incentives to encourage economic growth.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                           February 27, 2003

 Mr. Nickles (for himself and Mr. Miller) (by request) introduced the 
 following bill; which was read twice and referred to the Committee on 
                                Finance

_______________________________________________________________________

                                 A BILL


 
 To amend the Internal Revenue Code of 1986 to provide 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                                                                                                                         The corresponding percentages shall be substituted for  the following percentages:
                 taxable years     -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                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
        beginning:                  amount is:
        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
        beginning:                  amount is:
        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--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.--
            (1) In general.--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) Sections 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>