A bill to amend the Internal Revenue Code of 1986 to limit the interest deduction allowed corporations and to allow a deduction for dividends paid by corporations.

SECTION 1. LIMITATION ON INTEREST DEDUCTION ALLOWED CORPORATIONS.

    (a) In General.--Section 163 of the Internal Revenue Code of 1986 
(relating to deduction for interest) is amended by redesignating 
subsection (k) as subsection (l) and by inserting after subsection (j) 
the following new subsection:
    ``(k) Limitation on Corporate Interest Payments.--
            ``(1) In general.--Except as provided in paragraph (2), in 
        the case of a corporation, the amount otherwise allowed as a 
        deduction under this chapter for interest paid or accrued 
        during the taxable year by such corporation shall be reduced by 
        20 percent.
            ``(2) Exception for certain corporations.--
                    ``(A) In general.--Paragraph (1) shall not apply 
                for any taxable year to any corporation the earnings 
                and profits of which for such taxable year (computed as 
                of the close of the taxable year without diminution by 
                reason of any dividend distributions made during such 
                taxable year) do not exceed the lesser of--
                            ``(i) the corporation's tax liability under 
                        this chapter for such taxable year (determined 
                        after the application of paragraph (1)), or
                            ``(ii) $100,000.
                    ``(B) Controlled group.--For purposes of 
                subparagraph (A), all component members of a controlled 
                group (as defined in section 179(d)(7)) shall be 
                treated as 1 corporation.
            ``(3) Exception for farming businesses.--Paragraph (1) 
        shall not apply to any corporation substantially all of the 
        assets of which are used in the active conduct of a farming 
        business (as defined in section 448(d)(1)).''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 1993.

SEC. 2. DIVIDEND PAID DEDUCTION.

    (a) General Rule.--Part VIII of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 (relating to special deductions for 
corporations) is amended by striking the table of sections and section 
241 and inserting the following:

                              ``Subpart A. Dividend paid deduction.
                              ``Subpart B. Dividend received deduction.
                              ``Subpart C. Miscellaneous provisions.

``SEC. 230. ALLOWANCE OF SPECIAL DEDUCTIONS.

    ``In addition to the deductions provided in part VI (section 161 
and following), there shall be allowed as deductions in computing 
taxable income the items specified in this part.

                  ``Subpart A--Dividend Paid Deduction

                              ``Sec. 231. Dividend paid deduction.
                              ``Sec. 232. Qualified dividend account.
                              ``Sec. 233. Ineligible corporations.
                              ``Sec. 234. Special rules.

``SEC. 231. DIVIDEND PAID DEDUCTION.

    ``(a) Allowance of Deduction.--In the case of a corporation, there 
shall be allowed as a deduction an amount equal to 50 percent of the 
dividends paid by such corporation during the taxable year.
    ``(b) Limitation Based on Amount in Qualified Dividend Account.--
The amount of the dividends paid during any taxable year which may be 
taken into account under subsection (a) shall not exceed the amount in 
the corporation's qualified dividend account as of the close of such 
taxable year determined after the application of section 232(b)(1) for 
the taxable year but before the application of section 232(b)(2) for 
such taxable year.

``SEC. 232. QUALIFIED DIVIDEND ACCOUNT.

    ``(a) Establishment of Account.--Each corporation shall establish a 
qualified dividend account. The opening balance of such account shall 
be zero.
    ``(b) Adjustments to Accounts.--As of the close of each taxable 
year beginning after January 1, 1993, the qualified dividend account--
            ``(1) shall be increased by the adjusted taxable income of 
        the corporation for the taxable year, and
            ``(2) shall be reduced by the amount of the dividends paid 
        by the corporation during the taxable year to the extent the 
        amount so paid does not exceed the limitation of section 
        231(c).
    ``(c) Adjusted Taxable Income.--For purposes of this section--
            ``(1) In general.--The term `adjusted taxable income' means 
        taxable income adjusted as provided in this subsection.
            ``(2) Adjustment for certain qualifying dividends.--Taxable 
        income shall be increased by the deduction allowed under 
        section 243 with respect to that portion of any qualifying 
        dividend (as defined in section 243(b)(1)) for which such 
        deduction is determined at a rate of less than 100 percent. 
        Similar rules shall apply in the case of dividends for which 
        deductions are allowable under section 245(b).
            ``(3) Adjustment for tax credits.--
                    ``(A) In general.--Taxable income shall be reduced 
                by the deduction equivalent of the tentative 
                nonrefundable credits for the taxable year.
                    ``(B) Deduction equivalent.--For purposes of 
                subparagraph (A), the deduction equivalent of the 
                tentative nonrefundable credits for any taxable year is 
                the amount which (if allowed as a deduction for the 
                taxable year) would reduce the tax liability (as 
                defined in section 26(b)) for the taxable year by an 
                amount equal to the tentative nonrefundable credits.
                    ``(C) Tentative nonrefundable credits.--For 
                purposes of this paragraph, the term `tentative 
                nonrefundable credits' means the amount of the credits 
                which would have been allowable under part IV of 
                subchapter A of this chapter for the taxable year 
                (other than the credit allowable under section 34) if 
                no deduction were allowable under section 231.
            ``(4) Adjustment for corporate minimum tax.--If tax is 
        imposed by section 55 on the corporation for any taxable year, 
        taxable income for the succeeding taxable year shall be 
        increased by an amount equal to \35/100\ of the amount of tax 
        so imposed.
            ``(5) Dividend paid deduction not taken into account.--
        Taxable income shall be determined without regard to the 
        deduction allowed under section 231.

``SEC. 233. INELIGIBLE CORPORATIONS.

    ``(a) General Rule.--No deduction shall be allowed under section 
231 with respect to any dividend paid by--
            ``(1) a regulated investment company,
            ``(2) a real estate investment trust,
            ``(3) an S corporation,
            ``(4) any organization taxable under subchapter T of this 
        chapter (relating to cooperative organizations), or
            ``(5) a FSC or DISC.
    ``(b) Foreign Corporations.--In the case of a foreign corporation--
            ``(1) no deduction shall be allowed under section 231 for 
        dividends paid by such corporation during any taxable year 
        unless the corporation meets the requirements of section 245(a) 
        for such taxable year,
            ``(2) only adjusted taxable income effectively connected 
        with the conduct of a trade or business in the United States 
        and attributable to the uninterrupted period referred to in 
        section 245(a) shall be added to the qualified dividend 
        account, and
            ``(3) any distribution shall be treated as made ratably out 
        of income effectively connected with the conduct of a trade or 
        business in the United States and other income.

``SEC. 234. SPECIAL RULES.

    ``(a) Certain Distributions Not Treated as Dividends.--For purposes 
of this subpart, the term `dividend' does not include--
            ``(1) any distribution in redemption of stock, in 
        liquidation, or in a reorganization (whether or not such 
        distribution is treated as a distribution to which section 301 
        applies), and
            ``(2) any dividend described in section 244 (relating to 
        dividends received on certain preferred stock).
    ``(b) Deduction Not Taken Into Account for Purposes of Certain 
Limitations Based on Taxable Income.--For purposes of sections 246(c), 
613, 613A, and 593, taxable income shall be determined without regard 
to the deduction allowed under section 231.
    ``(c) Treatment of Dividends Received by 5-Percent Tax-Exempt 
Shareholders.--
            ``(1) In general.--For purposes of part III of subchapter F 
        (relating to taxation of unrelated business income of certain 
        exempt organizations), any dividend received by a tax-exempt 
        organization from a corporation in which such organization is a 
        5-percent shareholder shall be treated as unrelated business 
        taxable income to the extent of the amount of the deduction 
        allowable under section 231 to such corporation with respect to 
        such dividend. Except as provided in regulations, the amount of 
        such deduction shall be determined on the basis of the return 
        filed by the corporation for the taxable year.
            ``(2) Definitions.--For purposes of this subsection--
                    ``(A) 5-percent shareholder.--The term `5-percent 
                shareholder' means any tax-exempt organization which 
                owns (or is considered as owning within the meaning of 
                section 318)--
                            ``(i) 5 percent or more (by value) of the 
                        outstanding stock of the corporation, or
                            ``(ii) stock possessing 5 percent or more 
                        of the total combined voting power of all stock 
                        of the corporation.
                    ``(B) Tax-exempt organization.--The term `tax-
                exempt organization' means any organization which is 
                exempt from the tax imposed by this chapter.
                    ``(C) Related entities.--A tax-exempt organization 
                and 1 or more other tax-exempt organizations which 
                have--
                            ``(i) significant common purposes and 
                        substantial common membership, or
                            ``(ii) directly or indirectly substantial 
                        common direction or control, shall be treated 
                        as 1 tax-exempt organization for purposes of 
                        this paragraph.
    ``(d) Treatment of Subsequent Adjustments.--If there is any 
adjustment which affects the amount of the adjusted taxable income of a 
corporation for any taxable year (whether by reason of any carryback to 
such taxable year or otherwise) for purposes of this subpart and 
subpart B, the amount of such adjustment shall be treated as made as of 
the close of such taxable year.
    ``(e) Allocation of Qualified Dividend Account in Corporate 
Separations, Reorganizations, and Redemptions.--Adjustments similar to 
the adjustments provided in subsection (h) or (n)(7) of section 312 
shall be made to the qualified dividend account in the case of a 
transaction described in either of such subsections.
    ``(f) Mutual Life Insurance Companies.--
            ``(1) General rule.--In the case of a mutual life insurance 
        company, for purposes of this subpart, 80 percent of the 
        differential earnings amount (as defined in section 809(a)(3)) 
        shall be treated as a dividend paid to a shareholder.
            ``(2) Regulations.--The Secretary may prescribe regulations 
        applying rules consistent with this subpart to mutual life 
        insurance companies. Such regulations may include rules 
        treating an appropriate portion of the recomputed differential 
        earnings amount (as defined in section 809(f)(3)) as an 
        adjustment to the amount described in paragraph (1).

                ``Subpart B--Dividend Received Deduction

                              ``Sec. 243. Dividends received by 
                                        corporations.
                              ``Sec. 244. Dividends received on certain 
                                        preferred stock.
                              ``Sec. 245. Dividends received from 
                                        certain foreign corporations.
                              ``Sec. 246. Rules applying to deductions 
                                        for dividends received.
                              ``Sec. 246A. Dividends received deduction 
                                        reduced where portfolio stock 
                                        is debt financed.
                              ``Sec. 247. Dividends paid on certain 
                                        preferred stock of public 
                                        utilities.''.
    (b) Compensatory Withholding Tax on Dividends Paid to Nonresident 
Aliens or Foreign Corporations.--
            (1) General rule.--Subpart D of part II of subchapter N of 
        chapter 1 (relating to miscellaneous provisions) is amended by 
        adding at the end thereof the following new section:

``SEC. 899. ADDITIONAL TAX ON DIVIDENDS TO REFLECT DIVIDEND PAID 
              DEDUCTION.

    ``(a) General Rule.--In addition to any tax imposed by section 871 
or 881, there is hereby imposed a tax equal to 30.4 percent of the 
dividends received from sources within the United States by a 
nonresident alien individual or foreign corporation.
    ``(b) Tax Not To Apply to Shareholder's Effectively Connected 
Items.--The tax imposed by this section shall not apply to any dividend 
to the extent such dividend is effectively connected with the conduct 
of a trade or business by the shareholder within the United States.
    ``(c) Corresponding Increase in Withholding Tax.--In the case of 
any dividend subject to tax under subsection (a), the tax imposed by 
section 1441 or 1442 (as the case may be) shall be increased by an 
amount equal to the applicable percentage of such dividend.
    ``(d) Exception for Certain Treaty Countries.--The tax imposed by 
subsection (a) shall not apply to any dividend paid to a resident or 
corporation of a foreign country during any period--
            ``(1) in which an income tax treaty between such country 
        and the United States is in effect, and
            ``(2) during which there is in effect a certification by 
        the Secretary that--
                    ``(A) such income tax treaty has adequate 
                provisions to prevent treaty shopping, and
                    ``(B) if such foreign country imposes an income tax 
                comparable to the tax imposed by this subtitle and 
                grants relief from such tax to its residents, such 
                country grants relief equivalent to that provided in 
                section 231 with respect to dividends paid to United 
                States persons.
The requirements of paragraph (2) shall not apply to dividends paid 
before January 1, 1994.''.
            (2) Clerical amendment.--The table of sections for subpart 
        D of part II of subchapter N of chapter 1 is amended by adding 
        at the end thereof the following new item:

                              ``Sec. 899. Additional tax on dividends 
                                        to reflect dividend paid 
                                        deduction.''.
    (c) Section 381 To Apply to Qualified Dividend Account.--Subsection 
(c) of section 381 (relating to items of the distributor or transferor 
corporation) is amended by adding at the end thereof the following new 
paragraph:
            ``(27) Qualified dividend account.--Under regulations 
        prescribed by the Secretary, the acquiring corporation shall 
        take into account (to the extent proper to carry out the 
        purposes of this section and subpart A of part VIII of 
        subchapter B of this chapter) the qualified dividend account of 
        the distributor or transferor corporation.''.
    (d) Clerical Amendment.--Part VIII of subchapter B of chapter 1 is 
amended by inserting after section 247 the following:

                 ``Subpart C--Miscellaneous Provisions

                              ``Sec. 248. Organizational expenditures.
                              ``Sec. 249. Limitation on deduction of 
                                        bond premium on repurchase.''.

Summary: Amends the Internal Revenue Code to reduce the deduction for corporate interest payments by 20 percent. Excepts small corporations and farming businesses from such reduction. Allows corporations a deduction of 50 percent of the dividends paid during a taxable year. Limits such deduction to the amount in the qualified dividend account established by the corporation for the payment of such dividends. Prohibits the following corporations from using such deduction: (1) regulated investment companies, (2) real estate investment trusts, (3) an S corporation, (4) cooperative organizations. And (5) foreign sales corporations and domestic international sales corporations. Provides for an increase in the withholding tax on dividends paid to nonresident aliens or foreign corporations to reflect the dividend paid deduction. Requires, in the case of the acquisition of assets of a corporation by another corporation, that the acquiring corporation carryover the qualified dividend account.