To amend the Internal Revenue Code of 1986 to allow individuals to exclude dividend income.

Summary: Dividend Taxation Elimination Act of 2003 - Amends the Internal Revenue Code to exclude dividends from gross income, with specified exceptions. Sets forth exclusion limitations prior to 2007.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Dividend Taxation Elimination Act of 
2003''.

SEC. 2. EXEMPTION OF DIVIDEND INCOME FROM TAX.

    (a) In General.--Part III of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 (relating to amounts specifically 
excluded from gross income) is amended by inserting after section 115 
the following new section:

``SEC. 116. EXCLUSION OF DIVIDENDS RECEIVED BY INDIVIDUALS.

    ``(a) Exclusion From Gross Income.--Gross income does not include 
dividends which are otherwise includible in gross income and which are 
received during the taxable year by an individual.
    ``(b) Limitation Before 2007.--In the case of a taxable year 
beginning before January 1, 2007, the aggregate amount excluded under 
subsection (a) for any taxable year shall not exceed--
            ``(1) $25,000 in the case of taxable years beginning during 
        2003,
            ``(2) $50,000 in the case of taxable years beginning during 
        2004,
            ``(3) $75,000 in the case of taxable years beginning during 
        2005, and
            ``(4) $100,000 in the case of taxable years beginning 
        during 2006.
In the case of a joint return, the preceding sentence shall be applied 
by doubling each amount contained therein.
    ``(c) Special Rules.--For purposes of this section--
            ``(1) Exclusion not to apply to capital gain dividends from 
        regulated investment companies and real estate investment 
        trusts.--

                                ``For treatment of capital gain 
dividends, see sections 854(a) and 857(c).
            ``(2) Certain nonresident aliens ineligible for 
        exclusion.--In the case of a nonresident alien individual, 
        subsection (a) shall apply only in determining the taxes 
        imposed for the taxable year pursuant to sections 871(b)(1) and 
        877(b).
            ``(3) Dividends from employee stock ownership plans.--
        Subsection (a) shall not apply to any dividend described in 
        section 404(k).
            ``(4) Certain dividends excluded.--Subsection (a) shall not 
        apply to any dividend from a corporation which for the taxable 
        year of the corporation in which the distribution is made is a 
        corporation exempt from tax under section 521 (relating to 
        farmers' cooperative associations).''.
    (b) Conforming Amendments.--
            (1) Subparagraph (A) of section 32(i)(2) of such Code is 
        amended by inserting ``(determined without regard to section 
        116)'' before the comma.
            (2) Subparagraph (B) of section 86(b)(2) of such Code is 
        amended to read as follows:
                    ``(B) increased by the sum of--
                            ``(i) the amount of interest received or 
                        accrued by the taxpayer during the taxable year 
                        which is exempt from tax, and
                            ``(ii) the amount of dividends received 
                        during the taxable year which are excluded from 
                        gross income under section 116.''.
            (3) Subsection (d) of section 135 of such Code is amended 
        by redesignating paragraph (4) as paragraph (5) and by 
        inserting after paragraph (3) the following new paragraph:
            ``(4) Coordination with section 116.--This section shall be 
        applied before section 116.''.
            (4) Subsection (c) of section 584 of such Code is amended 
        by adding at the end the following new flush sentence:
``The proportionate share of each participant in the amount of 
dividends received by the common trust fund and to which section 116 
applies shall be considered for purposes of such section as having been 
received by such participant.''.
            (5) Subsection (a) of section 643 of such Code is amended 
        by redesignating paragraph (7) as paragraph (8) and by 
        inserting after paragraph (6) the following new paragraph:
            ``(7) Dividends.--There shall be included the amount of any 
        dividends excluded from gross income pursuant to section 
        116.''.
            (6) Section 854(a) of such Code is amended by inserting 
        ``section 116 (relating to exclusion of dividends received by 
        individuals) and'' after ``For purposes of''.
            (7) Section 857(c) of such Code is amended to read as 
        follows:
    ``(c) Restrictions Applicable to Dividends Received From Real 
Estate Investment Trusts.--
            ``(1) Treatment for section 116.--For purposes of section 
        116 (relating to exclusion of dividends received by 
        individuals), 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 shall not be considered as 
        a dividend.
            ``(2) Treatment for section 243.--For purposes of section 
        243 (relating to deductions for dividends received by 
        corporations), a dividend received from a real estate 
        investment trust which meets the requirements of this part 
        shall not be considered as a dividend.''.
            (8) The table of sections for part III of subchapter B of 
        chapter 1 of such Code is amended by inserting after the item 
        relating to section 115 the following new item:

                              ``Sec. 116. Exclusion of dividends 
                                        received by individuals.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.