I 

108TH CONGRESS 

1ST SESSION H. R. 170

To amend the Internal Revenue Code of 1986 to simplify and reduce the 

capital gain rates for all taxpayers and to exclude from gross income 

55 percent of the dividends received by individuals, and for other purposes. 

IN THE HOUSE OF REPRESENTATIVES 

JANUARY 7, 2003

Mr. REYNOLDS (for himself, Mr. DOOLITTLE, Mr. ENGLISH, and Mr. 

SOUDER) introduced the following bill; which was referred to the Committee on Ways and Means 

A BILL

To amend the Internal Revenue Code of 1986 to simplify 

and reduce the capital gain rates for all taxpayers and 

to exclude from gross income 55 percent of the dividends 

received by individuals, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Restoring Investor 

5 Confidence Act of 2003’’. 
2

•HR 170 IH 

1 SEC. 2. 55-PERCENT CAPITAL GAINS DEDUCTION FOR TAX2 PAYERS OTHER THAN CORPORATIONS. 

3 (a) IN GENERAL.—Section 1202 of the Internal Rev4 enue Code of 1986 is amended to read as follows: 

5 ‘‘SEC. 1202. CAPITAL GAINS DEDUCTION. 

6 ‘‘(a) GENERAL RULE.—If for any taxable year a tax7 payer other than a corporation has a net capital gain, 55 

8 percent of such gain shall be a deduction from gross in9 come. 

10 ‘‘(b) ESTATES AND TRUSTS.—In the case of an es11 tate or trust, the deduction shall be computed by excluding 

12 the portion (if any) of the gains for the taxable year from 

13 sales or exchanges of capital assets which, under sections 

14 652 and 662 (relating to inclusions of amounts in gross 

15 income of beneficiaries of trusts), is includible by the in16 come beneficiaries as gain derived from the sale or ex17 change of capital assets. 

18 ‘‘(c) COORDINATION WITH TREATMENT OF CAPITAL

19 GAIN UNDER LIMITATION ON INVESTMENT INTEREST.—

20 For purposes of this section, the net capital gain for any 

21 taxable year shall be reduced (but not below zero) by the 

22 amount which the taxpayer takes into account as invest23 ment income under section 163(d)(4)(B)(iii). 

24 ‘‘(d) TRANSITIONAL RULE.—
3

•HR 170 IH 

1 ‘‘(1) IN GENERAL.—In the case of a taxable 

2 year which includes January 1 of the year following 

3 the date of enactment of this section—

4 ‘‘(A) the amount taken into account as the 

5 net capital gain under subsection (a) shall not 

6 exceed the net capital gain determined by only 

7 taking into account gains and losses properly 

8 taken into account for the portion of the tax9 able year on or after such January 1, and 

10 ‘‘(B) the amount of the net capital gain 

11 taken into account in applying section 1(h) for 

12 such year shall be reduced by the amount taken 

13 into account under subparagraph (A) for such 

14 year. 

15 ‘‘(2) SPECIAL RULES FOR PASS-THRU ENTI16 TIES.—

17 ‘‘(A) IN GENERAL.—In applying paragraph 

18 (1) with respect to any pass-thru entity, the de19 termination of when gains and losses are prop20 erly taken into account shall be made at the en21 tity level. 

22 ‘‘(B) PASS-THRU ENTITY DEFINED.—For 

23 purposes of subparagraph (A), the term ‘pass24 thru entity’ means—

25 ‘‘(i) a regulated investment company, 
4

•HR 170 IH 

1 ‘‘(ii) a real estate investment trust, 

2 ‘‘(iii) an S corporation, 

3 ‘‘(iv) a partnership, 

4 ‘‘(v) an estate or trust, and 

5 ‘‘(vi) a common trust fund.’’.

6 (b) DEDUCTION ALLOWABLE IN COMPUTING AD7 JUSTED GROSS INCOME.—Section 62(a) of such Code (de8 fining adjusted gross income) is amended by inserting 

9 after paragraph (18) the following new paragraph: 

10 ‘‘(19) LONG-TERM CAPITAL GAINS.—The de11 duction allowed by section 1202.’’. 

12 (c) CONFORMING AMENDMENTS.—

13 (1) Section 1 of such Code is amended by strik14 ing subsection (h). 

15 (2) Section 170(e)(1) of such Code is amended 

16 by striking ‘‘the amount of gain’’ in the material fol17 lowing subparagraph (B)(ii) and inserting ‘‘45 per18 cent (50 percent in the case of a corporation) of the 

19 amount of gain’’. 

20 (3) Section 172(d)(2)(B) of such Code is 

21 amended to read as follows: 

22 ‘‘(B) the deduction under section 1202 

23 shall not be allowed.’’. 

24 (4) The last sentence of section 453A(c)(3) of 

25 such Code is amended by striking all that follows 
5

•HR 170 IH 

1 ‘‘long-term capital gain,’’ and inserting ‘‘the max2 imum rate on net capital gain under section 1201 or 

3 the deduction under section 1202 (whichever is ap4 propriate) shall be taken into account.’’.

5 (5) Section 642(c)(4) of such Code is amended 

6 to read as follows: 

7 ‘‘(4) ADJUSTMENTS.—To the extent that the 

8 amount otherwise allowable as a deduction under 

9 this subsection consists of gain from the sale or ex10 change of capital assets held for more than 1 year, 

11 proper adjustment shall be made for any deduction 

12 allowable to the estate or trust under section 1202 

13 (relating to capital gains deduction). In the case of 

14 a trust, the deduction allowed by this subsection 

15 shall be subject to section 681 (relating to unrelated 

16 business income).’’. 

17 (6) The last sentence of section 643(a)(3) of 

18 such Code is amended to read as follows: ‘‘The de19 duction under section 1202 (relating to capital gains 

20 deduction) shall not be taken into account.’’. 

21 (7) Section 643(a)(6)(C) of such Code is 

22 amended by inserting ‘‘(i)’’ before ‘‘there shall’’ and 

23 by inserting before the period ‘‘, and (ii) the deduc24 tion under section 1202 (relating to capital gains de25 duction) shall not be taken into account’’.
6

•HR 170 IH 

1 (8)(A) Section 904(b)(2) of such Code is 

2 amended by striking subparagraph (A), by redesig3 nating subparagraph (B) as subparagraph (A), and 

4 by inserting after subparagraph (A) (as so redesig5 nated) the following: 

6 ‘‘(B) OTHER TAXPAYERS.—In the case of 

7 a taxpayer other than a corporation, taxable in8 come from sources outside the United States 

9 shall include gain from the sale or exchange of 

10 capital assets only to the extent of foreign 

11 source capital gain net income.’’. 

12 (B) Section 904(b)(2)(A) of such Code, as so 

13 redesignated, is amended—

14 (i) by striking all that precedes clause (i) 

15 and inserting the following: 

16 ‘‘(A) CORPORATIONS.—In the case of a 

17 corporation—’’, and 

18 (ii) in clause (i), by striking ‘‘in lieu of ap19 plying subparagraph (A),’’. 

20 (C) Section 904(b)(3) of such Code is amended 

21 by striking subparagraphs (D) and (E) and inserting 

22 the following: 

23 ‘‘(D) RATE DIFFERENTIAL PORTION.—The 

24 rate differential portion of foreign source net 

25 capital gain, net capital gain, or the excess of 
7

•HR 170 IH 

1 net capital gain from sources within the United 

2 States over net capital gain, as the case may 

3 be, is the same proportion of such amount as 

4 the excess of the highest rate of tax specified in 

5 section 11(b) over the alternative rate of tax 

6 under section 1201(a) bears to the highest rate 

7 of tax specified in section 11(b).’’. 

8 (D) Section 593(b)(2)(D)(v) of such Code is 

9 amended—

10 (i) by striking ‘‘if there is a capital gain 

11 rate differential (as defined in section 

12 904(b)(3)(D)) for the taxable year,’’, and 

13 (ii) by striking ‘‘section 904(b)(3)(E)’’ and 

14 inserting ‘‘section 904(b)(3)(D)’’. 

15 (9) Section 1044(d) of such Code is amended 

16 by striking the last sentence. 

17 (10)(A) Section 1211(b)(2) of such Code is 

18 amended to read as follows: 

19 ‘‘(2) the sum of—

20 ‘‘(A) the excess of the net short-term cap21 ital loss over the net long-term capital gain, and 

22 ‘‘(B) one-half of the excess of the net long23 term capital loss over the net short-term capital 

24 gain.’’. 
8

•HR 170 IH 

1 (B) So much of section 1212(b)(2) of such 

2 Code as precedes subparagraph (B) thereof is 

3 amended to read as follows: 

4 ‘‘(2) SPECIAL RULES.—

5 ‘‘(A) ADJUSTMENTS.—

6 ‘‘(i) For purposes of determining the 

7 excess referred to in paragraph (1)(A), 

8 there shall be treated as short-term capital 

9 gain in the taxable year an amount equal 

10 to the lesser of—

11 ‘‘(I) the amount allowed for the 

12 taxable year under paragraph (1) or 

13 (2) of section 1211(b), or 

14 ‘‘(II) the adjusted taxable income 

15 for such taxable year. 

16 ‘‘(ii) For purposes of determining the 

17 excess referred to in paragraph (1)(B), 

18 there shall be treated as short-term capital 

19 gain in the taxable year an amount equal 

20 to the sum of—

21 ‘‘(I) the amount allowed for the 

22 taxable year under paragraph (1) or 

23 (2) of section 1211(b) or the adjusted 

24 taxable income for such taxable year, 

25 whichever is the least, plus 
9

•HR 170 IH 

1 ‘‘(II) the excess of the amount 

2 described in subclause (I) over the net 

3 short-term capital loss (determined) 

4 without regard to this subsection) for 

5 such year.’’. 

6 (C) Section 1212(b) of such Code is amended 

7 by adding at the end the following: 

8 ‘‘(3) TRANSITIONAL RULE.—In the case of any 

9 amount which, under this subsection and section 

10 1211(b) (as in effect for taxable years beginning be11 fore January 1, 2004), is treated as a capital loss 

12 in the first taxable year beginning after December 

13 31, 2003, paragraph (2) and section 1211(b) (as so 

14 in effect) shall apply (and paragraph (2) and section 

15 1211(b) as in effect for taxable years beginning 

16 after December 31, 2003, shall not apply) to the ex17 tent such amount exceeds the total of any capital 

18 gain net income (determined without regard to this 

19 subsection) for taxable years beginning after Decem20 ber 31, 2003.’’. 

21 (11) Section 1402(i)(1) of such Code is amend22 ed by inserting ‘‘, and the deduction provided by sec23 tion 1202 shall not apply’’ before the period at the 

24 end thereof. 
10

•HR 170 IH 

1 (12) Section 1445(e) of such Code is amend2 ed—

3 (A) in paragraph (1), by striking ‘‘35 per4 cent (or, to the extent provided in regulations, 

5 20 percent)’’ and inserting ‘‘17.5 percent (or, to 

6 the extent provided in regulation, 15.6 per7 cent)’’, and 

8 (B) in paragraph (2), by striking ‘‘35 per9 cent’’ and inserting ‘‘17.5 percent’’. 

10 (13)(A) The second sentence of section 

11 7518(g)(6)(A) of such Code is amended—

12 (i) by striking ‘‘during a taxable year to 

13 which section 1(h) or 1201(a) applies’’, and 

14 (ii) by striking ‘‘20 percent (34 percent’’ 

15 and inserting ‘‘10 percent (15.3 percent’’. 

16 (B) The second sentence of section 

17 607(h)(6)(A) of the Merchant Marine Act, 1936 is 

18 amended—

19 (i) by striking ‘‘during a taxable year to 

20 which section 1(h) or 1201(a) of such Code ap21 plies’’, and 

22 (ii) by striking ‘‘20 percent (34 percent’’ 

23 and inserting ‘‘10 percent (15.3 percent’’.
11

•HR 170 IH 

1 (14) The item relating to section 1202 in the 

2 table of sections for part I of subchapter P of chap3 ter 1 of such Code is amended to read as follows:

‘‘Sec. 1202. Capital gains deduction.’’.

4 (d) EFFECTIVE DATES.—

5 (1) IN GENERAL.—Except as otherwise pro6 vided in this subsection, the amendments, made by 

7 this section apply to taxable years ending after De8 cember 31 of the year which includes the date of en9 actment of this Act. 

10 (2) REPEAL OF SECTION 1(h).—The amend11 ment made by subsection (c)(1) applies to taxable 

12 years beginning on or after January 1 of the year 

13 following the date of enactment of this Act. 

14 (3) CONTRIBUTIONS.—The amendment made 

15 by subsection (c)(2) applies to contributions on or 

16 after January 1 of the year following the date of en17 actment of this Act. 

18 (4) USE OF LONG-TERM LOSSES.—The amend19 ments made by subsection (c)(10) apply to taxable 

20 years beginning on or after January 1 of the second 

21 year following the date of enactment of this Act. 

22 (5) WITHHOLDING.—The amendments made by 

23 subsection (c)(12) apply only to amounts paid on or 

24 after January 1 of the year following the date of en25 actment of this Act. 
12

•HR 170 IH 

1 SEC. 3. 55-PERCENT EXCLUSION OF DIVIDEND INCOME 

2 FROM TAX. 

3 (a) IN GENERAL.—Part III of subchapter B of chap4 ter 1 of the Internal Revenue Code of 1986 (relating to 

5 amounts specifically excluded from gross income) is 

6 amended by inserting after section 115 the following new 

7 section: 

8 ‘‘SEC. 116. 55-PERCENT EXCLUSION OF DIVIDENDS RE9 CEIVED BY INDIVIDUALS. 

10 ‘‘(a) EXCLUSION FROM GROSS INCOME.—Gross in11 come does not include 55 percent of the amounts received 

12 during the taxable year by an individual as dividends from 

13 domestic corporations. 

14 ‘‘(b) CERTAIN DIVIDENDS EXCLUDED.—Subsection 

15 (a) shall not apply to any dividend from a corporation 

16 which, for the taxable year of the corporation in which 

17 the distribution is made, or for the next preceding taxable 

18 year of the corporation, is a corporation exempt from tax 

19 under section 501 (relating to certain charitable, etc., or20 ganization) or section 521 (relating to farmers’ coopera21 tive associations). 

22 ‘‘(c) SPECIAL RULES.—For purposes of this sec23 tion—

24 ‘‘(1) EXCLUSION NOT TO APPLY TO CAPITAL

25 GAIN DIVIDENDS FROM REGULATED INVESTMENT
13

•HR 170 IH 

1 COMPANIES AND REAL ESTATE INVESTMENT

2 TRUSTS.—

‘‘For treatment of capital gain dividends, see sections 854(a) and 857(c).

3 ‘‘(2) CERTAIN NONRESIDENT ALIENS INELI4 GIBLE FOR EXCLUSION.—In the case of a non5 resident alien individual, subsection (a) shall apply 

6 only—

7 ‘‘(A) in determining the tax imposed for 

8 the taxable year pursuant to section 871(b)(1) 

9 and only in respect of dividends which are effec10 tively connected with the conduct of a trade or 

11 business within the United States, or 

12 ‘‘(B) in determining the tax imposed for 

13 the taxable year pursuant to section 877(b). 

14 ‘‘(3) DIVIDENDS FROM EMPLOYEE STOCK OWN15 ERSHIP PLANS.—Subsection (a) shall not apply to 

16 any dividend described in section 404(k).’’

17 (b) CONFORMING AMENDMENTS.—

18 (1)(A) Subparagraph (A) of section 135(c)(4) 

19 of such Code is amended by inserting ‘‘116,’’ before 

20 ‘‘137’’. 

21 (B) Subsection (d) of section 135 of such Code 

22 is amended by redesignating paragraph (4) as para23 graph (5) and by inserting after paragraph (3) the 

24 following new paragraph:
14

•HR 170 IH 

1 ‘‘(4) COORDINATION WITH SECTION 116.—This 

2 section shall be applied before section 116.’’

3 (2) Subsection (c) of section 584 of such Code 

4 is amended by adding at the end thereof the fol5 lowing new flush sentence: 

6 ‘‘The proportionate share of each participant in the 

7 amount of dividends received by the common trust fund 

8 and to which section 116 applies shall be considered for 

9 purposes of such section as having been received by such 

10 participant.’’

11 (3) Subsection (a) of section 643 of such Code 

12 is amended by redesignating paragraph (7) as para13 graph (8) and by inserting after paragraph (6) the 

14 following new paragraph: 

15 ‘‘(7) DIVIDENDS.—There shall be included the 

16 amount of any dividends excluded from gross income 

17 pursuant to section 116.’’

18 (4) Section 854(a) of such Code is amended by 

19 inserting ‘‘section 116 (relating to partial exclusion 

20 of dividends received by individuals) and’’ after ‘‘For 

21 purposes of’’. 

22 (5) Section 857(c) of such Code is amended to 

23 read as follows: 

24 ‘‘(c) RESTRICTIONS APPLICABLE TO DIVIDENDS RE25 CEIVED FROM REAL ESTATE INVESTMENT TRUSTS.—
15

•HR 170 IH 

1 ‘‘(1) TREATMENT FOR SECTION 116.—For pur2 poses of section 116 (relating to partial exclusion of 

3 dividends received by individuals), a capital gain div4 idend (as defined in subsection (b)(3)(C)) received 

5 from a real estate investment trust which meets the 

6 requirements of this part shall not be considered as 

7 a dividend. 

8 ‘‘(2) TREATMENT FOR SECTION 243.—For pur9 poses of section 243 (relating to deductions for divi10 dends received by corporations), a dividend received 

11 from a real estate investment trust which meets the 

12 requirements of this part shall not be considered as 

13 a dividend.’’

14 (6) The table of sections for part III of sub15 chapter B of chapter 1 of such Code is amended by 

16 inserting after the item relating to section 115 the 

17 following new item:

‘‘Sec. 116. 55-percent exclusion of dividends received by individuals.’’

18 (c) EFFECTIVE DATE.—The amendments made by 

19 this section shall apply to taxable years ending after De20 cember 31 of the year which includes the date of enact21 ment of this Act.

Æ