A bill to amend the Internal Revenue Code of 1986 to provide that dividend and interest income of individuals not be taxed at rates in excess of the maximum capital gains rate.

Summary: Amends the Internal Revenue Code to provide that dividends and interest income shall be taxed as net capital gain.

SECTION 1. DIVIDENDS AND INTEREST OF INDIVIDUALS TAXED AT CAPITAL GAIN 
              RATES.

    (a) In General.--Section 1(h) of the Internal Revenue Code of 1986 
(relating to maximum capital gains rate) is amended by adding at the 
end the following new paragraph:
            ``(13) Dividends and interest taxed as net capital gain.--
                    ``(A) In general.--For purposes of this subsection, 
                the term `net capital gain' means net capital gain 
                (determined without regard to this paragraph), 
                increased by qualified dividend income and qualified 
                interest income.
                    ``(B) Qualified dividend income.--For purposes of 
                this paragraph--
                            ``(i) In general.--The term `qualified 
                        dividend income' means dividends received from 
                        domestic corporations during the taxable year.
                            ``(ii) Certain dividends excluded.--Such 
                        term shall not include--
                                    ``(I) any dividend from a 
                                corporation which for the taxable year 
                                of the corporation in which the 
                                distribution is made, or the preceding 
                                taxable year, is a corporation exempt 
                                from tax under section 501 or 521,
                                    ``(II) any amount allowed as a 
                                deduction under section 591 (relating 
                                to deduction for dividends paid by 
                                mutual savings banks, etc.), and
                                    ``(III) any dividend described in 
                                section 404(k).
                            ``(iii) Minimum holding period.--Such term 
                        shall not include any dividend on any share of 
                        stock with respect to which the holding period 
                        requirements of section 246(c) are not met.
                    ``(C) Qualified interest income.--For purposes of 
                this paragraph, the term `qualified interest income' 
                means--
                            ``(i) interest on deposits with a bank (as 
                        defined in section 581),
                            ``(ii) amounts (whether or not designated 
                        as interest) paid, in respect of deposits, 
                        investment certificates, or withdrawable or 
                        repurchasable shares, by--
                                    ``(I) a mutual savings bank, 
                                cooperative bank, domestic building and 
                                loan association, industrial loan 
                                association or bank, or credit union, 
                                or
                                    ``(II) any other savings or thrift 
                                institution which is chartered and 
                                supervised under Federal or State law,
                        the deposits or accounts in which are insured 
                        under Federal or State law or which are 
                        protected and guaranteed under State law,
                            ``(iii) interest on--
                                    ``(I) evidences of indebtedness 
                                (including bonds, debentures, notes, 
                                and certificates) issued by a domestic 
                                corporation in registered form, and
                                    ``(II) to the extent provided in 
                                regulations prescribed by the 
                                Secretary, other evidences of 
                                indebtedness issued by a domestic 
                                corporation of a type offered by 
                                corporations to the public,
                            ``(iv) interest on obligations of the 
                        United States, a State, or a political 
                        subdivision of a State (not excluded from gross 
                        income of the taxpayer under any other 
                        provision of law), and
                            ``(v) interest attributable to 
                        participation shares in a trust established and 
                        maintained by a corporation established 
                        pursuant to Federal law.
                    ``(D) Special rules.--
                            ``(i) Amounts taken into account as 
                        investment income.--Qualified dividend income 
                        and qualified interest income shall not include 
                        any amount which the taxpayer takes into 
                        account as investment income under section 
                        163(d)(4)(B).
                            ``(ii) Nonresident aliens.--In the case of 
                        a nonresident alien individual, subparagraph 
                        (A) shall apply only--
                                    ``(I) in determining the tax 
                                imposed for the taxable year pursuant 
                                to section 871(b) and only in respect 
                                of amounts which are effectively 
                                connected with the conduct of a trade 
                                or business within the United States, 
                                and
                                    ``(II) in determining the tax 
                                imposed for the taxable year pursuant 
                                to section 877.
                            ``(iii) Treatment of dividends from 
                        regulated investment companies and real estate 
                        investment trusts.--

                                ``For treatment of dividends from 
regulated investment companies and real estate investment trusts, see 
sections 854 and 857.''
    (b) Exclusion of Dividends and Interest From Investment Income.--
Subparagraph (B) of section 163(d)(4) of the Internal Revenue Code of 
1986 (defining net investment income) is amended by adding at the end 
the following flush sentence:
                ``Such term shall include qualified dividend income (as 
                defined in section 1(h)(13)(B)) or qualified interest 
                income (as defined in section 1(h)(13)(C)) only to the 
                extent the taxpayer elects to treat such income as 
                investment income for purposes of this subsection.''
    (c) Treatment of Dividends From Regulated Investment Companies.--
            (1) Subsection (a) of section 854 of the Internal Revenue 
        Code of 1986 (relating to dividends received from regulated 
        investment companies) is amended by inserting ``section 
        1(h)(13) (relating to maximum rate of tax on dividends and 
        interest) and'' after ``For purposes of''.
            (2) Paragraph (1) of section 854(b) of such Code (relating 
        to other dividends) is amended by redesignating subparagraph 
        (B) as subparagraph (C) and by inserting after subparagraph (A) 
        the following new subparagraph:
                    ``(B) Maximum rate under section 1(h).--
                            ``(i) In general.--If the sum of the 
                        aggregate dividends received, and the aggregate 
                        interest described in section 1(h)(13)(C) 
                        received, by a regulated investment company 
                        during any taxable year is less than 95 percent 
                        of its gross income, then, in computing the 
                        maximum rate under section 1(h)(13), rules 
                        similar to the rules of subparagraph (A) shall 
                        apply.
                            ``(ii) Gross income.--For purposes of 
                        clause (i), in the case of 1 or more sales or 
                        other dispositions of stock or securities, the 
                        term `gross income' includes only the excess 
                        of--
                                    ``(I) the net short-term capital 
                                gain from such sales or dispositions, 
                                over
                                    ``(II) the net long-term capital 
                                loss from such sales or dispositions.''
            (3) Subparagraph (C) of section 854(b)(1) of such Code, as 
        redesignated by paragraph (2), is amended by striking 
        ``subparagraph (A)'' and inserting ``subparagraph (A) or (B)''.
            (4) Paragraph (2) of section 854(b) of such Code is amended 
        by inserting ``the maximum rate under section 1(h)(13) and'' 
        after ``for purposes of''.
    (d) Treatment of Dividends Received From Real Estate Investment 
Trusts.--Section 857(c) of the Internal Revenue Code of 1986 (relating 
to restrictions applicable to dividends received from real estate 
investment trusts) is amended to read as follows:
    ``(c) Restrictions Applicable to Dividends Received From Real 
Estate Investment Trusts.--
            ``(1) In general.--For purposes of section 1(h)(13) 
        (relating to maximum rate of tax on dividends and interest) and 
        section 243 (relating to deductions received by corporations), 
        a dividend received from a real estate investment trust which 
        meets the requirements of this part shall not be considered a 
        dividend.
            ``(2) Treatment as interest.--
                    ``(A) In general.--For purposes of section 
                1(h)(13), in the case of a dividend (other than a 
                capital gain dividend, as defined in subsection 
                (b)(3)(C)) received from a real estate investment trust 
                which meets the requirements of this part for the 
                taxable year in which it paid--
                            ``(i) such dividend shall be treated as 
                        interest if the aggregate interest received by 
                        the real estate investment trust for the 
                        taxable year equals or exceeds 75 percent of 
                        its gross income, or
                            ``(ii) if clause (i) does not apply, the 
                        portion of such dividend which bears the same 
                        ratio to the amount of such dividend as the 
                        aggregate interest received bears to gross 
                        income shall be treated as interest.
                    ``(B) Adjustments to gross income and aggregate 
                interest received.--For purposes of subparagraph (B)--
                            ``(i) gross income does not include the net 
                        capital gain,
                            ``(ii) gross income and aggregate interest 
                        received shall each be reduced by so much of 
                        the deduction allowable by section 163 for the 
                        taxable year (other than for interest on 
                        mortgages on real property owned by the real 
                        estate investment trust) as does not exceed 
                        aggregate interest received by the taxable 
                        year, and
                            ``(iii) gross income shall be reduced by 
                        the sum of the taxes imposed by paragraphs (4), 
                        (5), and (6) of section 857(b).
                    ``(C) Aggregate interest received.--For purposes of 
                this subsection, aggregate interest received shall be 
                computed by taking into account only interest which is 
                described in section 1(13)(C).
                    ``(D) Notice to shareholders.--The amount of any 
                distribution by a real estate investment trust which 
                may be taken into account as interest for purposes of 
                section 1(h)(13) shall not exceed the amount so 
                designated by the trust in a written notice to its 
                shareholders mailed not later than 45 days after the 
                close of its taxable year.''
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.