I

104TH CONGRESS

1ST SESSION H. R. 1041

To amend the Internal Revenue Code of 1986 to provide an exclusion for

all dividends and interest received by individuals.

IN THE HOUSE OF REPRESENTATIVES

FEBRUARY 24, 1995

Mr. CRANE (for himself, Mr. BLUTE, Mr. MCKEON, and Mr. HANCOCK) 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 provide

an exclusion for all dividends and interest received by

individuals.

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

3 SECTION 1. EXCLUSION OF DIVIDENDS AND INTEREST RE4 CEIVED BY INDIVIDUALS.

5 (a) IN GENERAL.—Part III of subchapter B of chap6 ter 1 of the Internal Revenue Code of 1986 (relating to

7 amounts specifically excluded from gross income) is

8 amended by inserting after section 115 the following new

9 section:
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1 ‘‘SEC. 116. EXCLUSION OF DIVIDENDS AND INTEREST RE2 CEIVED BY INDIVIDUALS.

3 ‘‘(a) EXCLUSION FROM GROSS INCOME.—Gross in4 come does not include the sum of the amounts received

5 during the taxable year by an individual as—

6 ‘‘(1) dividends from domestic corporations, or

7 ‘‘(2) interest.

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

9 (a)(1) shall not apply to any dividend from a corporation

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

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

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

13 under section 501 (relating to certain charitable, etc., or14 ganization) or section 521 (relating to farmers’ coopera15 tive associations).

16 ‘‘(c) SPECIAL RULES.—For purposes of this sec17 tion—

18 ‘‘(1) DISTRIBUTIONS FROM REGULATED IN19 VESTMENT COMPANIES AND REAL ESTATE INVEST20 MENT TRUSTS.—Subsection (a) shall apply with re21 spect to distributions by—

22 ‘‘(A) regulated investment companies to

23 the extent provided in section 854(c), and

24 ‘‘(B) real estate investment trusts to the

25 extent provided in section 857(c).
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1 ‘‘(2) DISTRIBUTIONS BY A TRUST.—For pur2 poses of subsection (a), the amount of dividends and

3 interest properly allocable to a beneficiary under sec4 tion 652 or 662 shall be deemed to have been re5 ceived by the beneficiary ratably on the same date

6 that the dividends and interest were received by the

7 estate or trust.

8 ‘‘(3) CERTAIN NONRESIDENT ALIENS INELI9 GIBLE FOR EXCLUSION.—In the case of a non10 resident alien individual, subsection (a) shall apply

11 only—

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

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

14 and only in respect of dividends and interest

15 which are effectively connected with the conduct

16 of a trade or business within the United States,

17 or

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

19 the taxable year pursuant to section 877(b).’’

20 (b) CLERICAL AND CONFORMING AMENDMENTS.—

21 (1) The table of sections for part III of sub22 chapter B of chapter 1 of such Code is amended by

23 inserting after the item relating to section 115 the

24 following new item:

‘‘Sec. 116. Exclusion of dividends and interest received by individuals.’’
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1 (2) Paragraph (2) of section 265(a) of such

2 Code is amended by inserting before the period at

3 the end thereof the following: ‘‘, or to purchase or

4 carry obligations or shares, or to make deposits, to

5 the extent the interest thereon is excludable from

6 gross income under section 116’’.

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

8 is amended by adding at the end thereof the follow9 ing new sentence:

10 ‘‘The proportionate share of each participant in the

11 amount of dividends or interest received by the common

12 trust fund and to which section 116 applies shall be con13 sidered for purposes of such section as having been re14 ceived by such participant.’’

15 (4) Subsection (a) of section 643 of such Code

16 is amended by inserting after paragraph (6) the fol17 lowing new paragraph:

18 ‘‘(7) DIVIDENDS OR INTEREST.—There shall be

19 included the amount of any dividends or interest ex20 cluded from gross income pursuant to section 116.’’

21 (5) Section 854 of such Code is amended by

22 adding at the end thereof the following new sub23 section:

24 ‘‘(c) TREATMENT UNDER SECTION 116.—
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1 ‘‘(1) IN GENERAL.—For purposes of section

2 116, in the case of any dividend (other than a divi3 dend described in subsection (a)) received from a

4 regulated investment company which meets the re5 quirements of section 852 for the taxable year in

6 which it paid the dividend—

7 ‘‘(A) the entire amount of such dividend

8 shall be treated as a dividend if the aggregate

9 dividends and interest received by such com10 pany during the taxable year equal or exceed 75

11 percent of its gross income, or

12 ‘‘(B) if subparagraph (A) does not apply,

13 a portion of such dividend shall be treated as

14 a dividend (and a portion of such dividend shall

15 be treated as interest) based on the portion of

16 the company’s gross income which consists of

17 aggregate dividends or aggregate interest, as

18 the case may be.

19 For purposes of the preceding sentence, gross in20 come and aggregate interest received shall each be

21 reduced by so much of the deduction allowable by

22 section 163 for the taxable year as does not exceed

23 aggregate interest received for the taxable year.

24 ‘‘(2) NOTICE TO SHAREHOLDERS.—The amount

25 of any distribution by a regulated investment com-
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1 pany which may be taken into account as a dividend

2 for purposes of the exclusion under section 116 shall

3 not exceed the amount so designated by the com4 pany in a written notice to its shareholders mailed

5 not later than 45 days after the close of its taxable

6 year.

7 ‘‘(3) DEFINITIONS.—For purposes of this sub8 section—

9 ‘‘(A) The term ‘gross income’ does not in10 clude gain from the sale or other disposition of

11 stock or securities.

12 ‘‘(B) The term ‘aggregate dividends re13 ceived’ includes only dividends received from do14 mestic corporations other than dividends de15 scribed in section 116(b)(2). In determining the

16 amount of any dividend for purposes of this

17 subparagraph, the rules provided in section

18 116(c)(1) (relating to certain distributions)

19 shall apply.’’

20 (6) Subsection (c) of section 857 of such Code

21 is amended to read as follows:

22 ‘‘(c) LIMITATIONS APPLICABLE TO DIVIDENDS RE23 CEIVED FROM REAL ESTATE INVESTMENT TRUSTS.—

24 ‘‘(1) IN GENERAL.—For purposes of section

25 116 (relating to an exclusion for dividends and inter-
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1 est received by individuals) and section 243 (relating

2 to deductions for dividends received by corpora3 tions), a dividend received from a real estate invest4 ment trust which meets the requirements of this

5 part shall not be considered as a dividend.

6 ‘‘(2) TREATMENT AS INTEREST.—In the case of

7 a dividend (other than a capital gain dividend, as de8 fined in subsection (b)(3)(C)) received from a real

9 estate investment trust which meets the require10 ments of this part for the taxable year in which it

11 paid the dividend—

12 ‘‘(A) such dividend shall be treated as in13 terest if the aggregate interest received by the

14 real estate investment trust for the taxable year

15 equals or exceeds 75 percent of its gross in16 come, or

17 ‘‘(B) if subparagraph (A) does not apply,

18 the portion of such dividend which bears the

19 same ratio to the amount of such dividend as

20 the aggregate interest received bears to gross

21 income shall be treated as interest.

22 ‘‘(3) ADJUSTMENTS TO GROSS INCOME AND AG23 GREGATE INTEREST RECEIVED.—For purposes of

24 paragraph (2)—
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1 ‘‘(A) gross income does not include the net

2 capital gain,

3 ‘‘(B) gross income and aggregate interest

4 received shall each be reduced by so much of

5 the deduction allowable by section 163 for the

6 taxable year (other than for interest on mort7 gages on real property owned by the real estate

8 investment trust) as does not exceed aggregate

9 interest received by the taxable year, and

10 ‘‘(C) gross income shall be reduced by the

11 sum of the taxes imposed by paragraphs (4),

12 (5), and (6) of section 857(b).

13 ‘‘(4) NOTICE TO SHAREHOLDERS.—The amount

14 of any distribution by a real estate investment trust

15 which may be taken into account as interest for pur16 poses of the exclusion under section 116 shall not

17 exceed the amount so designated by the trust in a

18 written notice to its shareholders mailed not later

19 than 45 days after the close of its taxable year.’’

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

21 this section shall apply with respect to taxable years begin22 ning after December 31, 1994.

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