I 

108TH CONGRESS 

1ST SESSION H. R. 2

To amend the Internal Revenue Code of 1986 to provide additional tax 

incentives to encourage economic growth. 

IN THE HOUSE OF REPRESENTATIVES 

FEBRUARY 27, 2003

Mr. THOMAS 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 

additional tax incentives to encourage economic growth.

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; REFERENCES; TABLE OF CON4 TENTS. 

5 (a) SHORT TITLE.—This Act may be cited as the 

6 ‘‘Jobs and Growth Tax Act of 2003’’. 

7 (b) AMENDMENT OF 1986 CODE.—Except as other8 wise expressly provided, whenever in this Act an amend9 ment or repeal is expressed in terms of an amendment 

10 to, or repeal of, a section or other provision, the reference 
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1 shall be considered to be made to a section or other provi2 sion of the Internal Revenue Code of 1986. 

3 (c) TABLE OF CONTENTS.—The table of contents of 

4 this Act is as follows:

Sec. 1. Short title; references; table of contents. 

TITLE I—ACCELERATION OF CERTAIN PREVIOUSLY ENACTED 

TAX REDUCTIONS; INCREASED EXPENSING FOR SMALL BUSINESSES 

Sec. 101. Acceleration of 10-percent individual income tax rate bracket expansion. 

Sec. 102. Acceleration of reduction in individual income tax rates. 

Sec. 103. Acceleration of 15-percent individual income tax rate bracket expansion for married taxpayers filing joint returns. 

Sec. 104. Acceleration of increase in standard deduction for married taxpayers 

filing joint returns. 

Sec. 105. Acceleration of increase in child tax credit. 

Sec. 106. Increased expensing for small business. 

Sec. 107. Minimum tax relief to individuals. 

Sec. 108. Application of EGTRRA sunset to this title. 

TITLE II—DIVIDEND EXCLUSION TO ELIMINATE DOUBLE 

TAXATION OF CORPORATE EARNINGS 

Sec. 201. Dividend exclusion to eliminate double taxation of corporate earnings. 

Sec. 202. Rules for application of dividend exclusion and retained earnings 

basis adjustments. 

Sec. 203. Treatment of regulated investment companies and real estate investment trusts. 

Sec. 204. Treatment of insurance companies. 

Sec. 205. Treatment of S corporations. 

Sec. 206. Repeal of accumulated earnings tax and personal holding company 

tax. 

Sec. 207. Effective dates.
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1 TITLE I—ACCELERATION OF 

2 CERTAIN PREVIOUSLY EN3 ACTED TAX REDUCTIONS; IN4 CREASED EXPENSING FOR 

5 SMALL BUSINESSES 

6 SEC. 101. ACCELERATION OF 10-PERCENT INDIVIDUAL IN7 COME TAX RATE BRACKET EXPANSION. 

8 (a) IN GENERAL.—Clause (i) of section 1(i)(1)(B) 

9 (relating to the initial bracket amount) is amended by 

10 striking ‘‘($12,000 in the case of taxable years beginning 

11 before January 1, 2008)’’. 

12 (b) INFLATION ADJUSTMENT BEGINNING IN 2003.—

13 Section 1(i)(1)(C) (relating to inflation adjustment) is 

14 amended to read as follows: 

15 ‘‘(C) INFLATION ADJUSTMENT.—In pre16 scribing the tables under subsection (f) which 

17 apply with respect to taxable years beginning in 

18 calendar years after 2002—

19 ‘‘(i) the cost-of-living adjustment used 

20 in making adjustments to the initial brack21 et amount shall be determined under sub22 section (f)(3) by substituting ‘2001’ for 

23 ‘1992’ in subparagraph (B) thereof, and 
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1 ‘‘(ii) such adjustment shall not apply 

2 to the amount referred to in subparagraph 

3 (B)(iii). 

4 If any amount after adjustment under the pre5 ceding sentence is not a multiple of $50, such 

6 amount shall be rounded to the next lowest 

7 multiple of $50.’’. 

8 (c) EFFECTIVE DATE.—

9 (1) IN GENERAL.—The amendments made by 

10 this section shall apply to taxable years beginning 

11 after December 31, 2002. 

12 (2) TABLES FOR 2003.—The Secretary of the 

13 Treasury shall modify each table which has been 

14 prescribed for taxable years beginning in 2003 and 

15 which relates to any amendment made by this sec16 tion, section 102, or section 103 to reflect each such 

17 amendment. 

18 SEC. 102. ACCELERATION OF REDUCTION IN INDIVIDUAL 

19 INCOME TAX RATES. 

20 (a) IN GENERAL.—The table in paragraph (2) of sec21 tion 1(i) (relating to reductions in rates after June 30, 

22 2001) is amended to read as follows:

‘‘In the case of taxable years

beginning during calendar year: 

The corresponding percentages 

shall be substituted for

the following percentages: 

28% 31% 36% 39.6%

2001 .......................................................................... 27.5% 30.5% 35.5% 39.1%

2002 .......................................................................... 27.0% 30.0% 35.0% 38.6%

2003 and thereafter .................................................. 25.0% 28.0% 33.0% 35.0%’’. 
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1 (b) EFFECTIVE DATE.—The amendment made by 

2 this section shall apply to taxable years beginning after 

3 December 31, 2002. 

4 SEC. 103. ACCELERATION OF 15-PERCENT INDIVIDUAL IN5 COME TAX RATE BRACKET EXPANSION FOR 

6 MARRIED TAXPAYERS FILING JOINT RE7 TURNS. 

8 (a) IN GENERAL.—Paragraph (8) of section 1(f ) (re9 lating to phaseout of marriage penalty in 15-percent 

10 bracket) is amended to read as follows: 

11 ‘‘(8) ELIMINATION OF MARRIAGE PENALTY IN

12 15-PERCENT BRACKET.—With respect to taxable 

13 years beginning after December 31, 2002, in pre14 scribing the tables under paragraph (1)—

15 ‘‘(A) the maximum taxable income in the 

16 15 percent rate bracket in the table contained 

17 in subsection (a) (and the minimum taxable in18 come in the next higher taxable income bracket 

19 in such table) shall be 200 percent of the max20 imum taxable income in the 15-percent rate 

21 bracket in the table contained in subsection (c) 

22 (after any other adjustment under this sub23 section), and 

24 ‘‘(B) the comparable taxable income 

25 amounts in the table contained in subsection 
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(d) shall be 1 1 ⁄2 of the amounts determined 

2 under subparagraph (A).’’. 

3 (b) CONFORMING AMENDMENTS.—

4 (1) The heading for subsection (f ) of section 1 

5 is amended by striking ‘‘PHASEOUT’’ and inserting 

6 ‘‘ELIMINATION’’. 

7 (2) Section 302(c) of the Economic Growth and 

8 Tax Relief Reconciliation Act of 2001 is amended by 

9 striking ‘‘2004’’ and inserting ‘‘2002’’. 

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

11 this section shall apply to taxable years beginning after 

12 December 31, 2002. 

13 SEC. 104. ACCELERATION OF INCREASE IN STANDARD DE14 DUCTION FOR MARRIED TAXPAYERS FILING 

15 JOINT RETURNS. 

16 (a) IN GENERAL.—Paragraph (2) of section 63(c) 

17 (relating to basic standard deduction) is amended to read 

18 as follows: 

19 ‘‘(2) BASIC STANDARD DEDUCTION.—For pur20 poses of paragraph (1), the basic standard deduction 

21 is—

22 ‘‘(A) 200 percent of the dollar amount in 

23 effect under subparagraph (C) for the taxable 

24 year in the case of—

25 ‘‘(i) a joint return, or 
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1 ‘‘(ii) a surviving spouse (as defined in 

2 section 2(a)), 

3 ‘‘(B) $4,400 in the case of a head of 

4 household (as defined in section 2(b)), or 

5 ‘‘(C) $3,000 in any other case.’’. 

6 (b) CONFORMING AMENDMENTS.—

7 (1) Section 63(c)(4) is amended by striking 

8 ‘‘(2)(D)’’ each place it occurs and inserting 

9 ‘‘(2)(C)’’. 

10 (2) Section 63(c) is amended by striking para11 graph (7). 

12 (3) Section 301(d) of the Economic Growth and 

13 Tax Relief Reconciliation Act of 2001 is amended by 

14 striking ‘‘2004’’ and inserting ‘‘2002’’. 

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

16 this section shall apply to taxable years beginning after 

17 December 31, 2002.

18 SEC. 105. ACCELERATION OF INCREASE IN CHILD TAX 

19 CREDIT. 

20 (a) IN GENERAL.—Subsection (a) of section 24 (re21 lating to child tax credit) is amended to read as follows: 

22 ‘‘(a) ALLOWANCE OF CREDIT.—There shall be al23 lowed as a credit against the tax imposed by this chapter 

24 for the taxable year with respect to each qualifying child 

25 of the taxpayer an amount equal to $1,000.’’. 
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1 (b) ADVANCE PAYMENT OF PORTION OF INCREASED

2 CREDIT IN 2003.—

3 (1) IN GENERAL.—Subchapter B of chapter 65 

4 (relating to abatements, credits, and refunds) is 

5 amended by adding at the end the following new sec6 tion: 

7 ‘‘SEC. 6429. ADVANCE PAYMENT OF PORTION OF IN8 CREASED CHILD CREDIT. 

9 ‘‘(a) IN GENERAL.—Each eligible taxpayer shall be 

10 treated as having made a payment against the tax imposed 

11 by chapter 1 for such taxpayer’s first taxable year begin12 ning in 2002 in an amount equal to the child tax credit 

13 refund amount. 

14 ‘‘(b) ELIGIBLE TAXPAYER.—For purposes of this 

15 section, the term ‘eligible taxpayer’ means any taxpayer 

16 if—

17 ‘‘(1) such taxpayer was allowed a credit under 

18 section 24 for such taxpayer’s first taxable year be19 ginning in 2002, and 

20 ‘‘(2) at least one qualifying child (as defined in 

21 section 24(c)) of the taxpayer for such year meets 

22 the age requirement for 2003. 

23 ‘‘(c) CHILD TAX CREDIT REFUND AMOUNT.—
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1 ‘‘(1) IN GENERAL.—For purposes of this sec2 tion, the child tax credit refund amount is equal to 

3 the excess (if any) of—

4 ‘‘(A) the amount which would have been 

5 allowed as a credit under section 24 for the tax6 payer’s first taxable year beginning in 2002 

7 if—

8 ‘‘(i) the per child amount for such 

9 year were $1,000, and 

10 ‘‘(ii) only qualifying children (as de11 fined in section 24(c)) of the taxpayer for 

12 such year who meet the age requirement 

13 for 2003 were taken into account, over 

14 ‘‘(B) the amount which would have been 

15 allowed as a credit under section 24 for the tax16 payer’s first taxable year beginning in 2002 if 

17 only qualifying children (as defined in section 

18 24(c)) of the taxpayer for such year who meet 

19 the age requirement for 2003 were taken into 

20 account. 

21 ‘‘(2) ADJUSTMENTS.—The amounts described 

22 in subparagraphs (A) and (B) of paragraph (1) shall 

23 be determined—

24 ‘‘(A) without regard to section 

25 24(d)(1)(B)(ii), and 
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1 ‘‘(B) as if the credit allowed under section 

2 24(d) were allowed under section 24. 

3 ‘‘(d) AGE REQUIREMENT.—A child of a taxpayer 

4 meets the age requirement for 2003 if such child meets 

5 the requirement of section 24(c)(1)(B) for the taxpayer’s 

6 first taxable year beginning in 2003. 

7 ‘‘(e) TIMING OF PAYMENTS.—In the case of any over8 payment attributable to this section, the Secretary shall, 

9 subject to the provisions of this title, refund or credit such 

10 overpayment as rapidly as possible and, to the extent prac11 ticable, before December 31, 2003. 

12 ‘‘(f) COORDINATION WITH CHILD TAX CREDIT.—

13 ‘‘(1) IN GENERAL.—The amount of credit 

14 which would (but for this paragraph) be allowable 

15 under section 24 for the taxpayer’s first taxable year 

16 beginning in 2003 shall be reduced (but not below 

17 zero) by the aggregate refunds and credits made or 

18 allowed to the taxpayer under this section. Any fail19 ure to so reduce the credit shall be treated as arising 

20 out of a mathematical or clerical error and assessed 

21 according to section 6213(b)(1). 

22 ‘‘(2) JOINT RETURNS.—In the case of a refund 

23 or credit made or allowed under this section with re24 spect to a joint return, half of such refund or credit 
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1 shall be treated as having been made or allowed to 

2 each individual filing such return. 

3 ‘‘(g) NO INTEREST.—No interest shall be allowed on 

4 any overpayment attributable to this section.’’. 

5 (2) CLERICAL AMENDMENT.—The table of sec6 tions for subchapter B of chapter 65 is amended by 

7 adding at the end the following new item:

‘‘Sec. 6429. Advance payment of portion of increased child credit.’’.

8 (c) EFFECTIVE DATES.—

9 (1) SUBSECTION (a).—The amendment made 

10 by subsection (a) shall apply to taxable years begin11 ning after December 31, 2002. 

12 (2) SUBSECTION (b).—The amendments made 

13 by subsection (b) shall take effect on the date of the 

14 enactment of this Act. 

15 SEC. 106. INCREASED EXPENSING FOR SMALL BUSINESS. 

16 (a) IN GENERAL.—Paragraph (1) of section 179(b) 

17 (relating to dollar limitation) is amended to read as fol18 lows: 

19 ‘‘(1) DOLLAR LIMITATION.—The aggregate cost 

20 which may be taken into account under subsection 

21 (a) for any taxable year shall not exceed $75,000.’’. 

22 (b) INCREASE IN QUALIFYING INVESTMENT AT

23 WHICH PHASEOUT BEGINS.—Paragraph (2) of section 

24 179(b) (relating to reduction in limitation) is amended by 

25 striking ‘‘$200,000’’ and inserting ‘‘$325,000’’. 
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1 (c) OFF-THE-SHELF COMPUTER SOFTWARE.—Para2 graph (1) of section 179(d) (defining section 179 prop3 erty) is amended to read as follows: 

4 ‘‘(1) SECTION 179 PROPERTY.—For purposes of 

5 this section, the term ‘section 179 property’ means 

6 property—

7 ‘‘(A) which is—

8 ‘‘(i) tangible property (to which sec9 tion 168 applies), or 

10 ‘‘(ii) computer software (as defined in 

11 section 197(e)(3)(B)) which is described in 

12 section 197(e)(3)(A)(i) and to which sec13 tion 167 applies, 

14 ‘‘(B) which is section 1245 property (as 

15 defined in section 1245(a)(3)), and 

16 ‘‘(C) which is acquired by purchase for use 

17 in the active conduct of a trade or business. 

18 Such term shall not include any property described 

19 in section 50(b) and shall not include air condi20 tioning or heating units.’’. 

21 (d) ADJUSTMENT OF DOLLAR LIMIT AND PHASEOUT

22 THRESHOLD FOR INFLATION.—Subsection (b) of section 

23 179 (relating to limitations) is amended by adding at the 

24 end the following new paragraph: 

25 ‘‘(5) INFLATION ADJUSTMENTS.—
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1 ‘‘(A) IN GENERAL.—In the case of any 

2 taxable year beginning in a calendar year after 

3 2003, the dollar amounts in paragraphs (1) and 

4 (2) shall each be increased by an amount equal 

5 to—

6 ‘‘(i) such dollar amount, multiplied by 

7 ‘‘(ii) the cost-of-living adjustment de8 termined under section 1(f)(3) for the cal9 endar year in which the taxable year be10 gins, by substituting ‘calendar year 2002’ 

11 for ‘calendar year 1992’ in subparagraph 

12 (B) thereof. 

13 ‘‘(B) ROUNDING.—

14 ‘‘(i) DOLLAR LIMITATION.—If the 

15 amount in paragraph (1) as increased 

16 under subparagraph (A) is not a multiple 

17 of $1,000, such amount shall be rounded 

18 to the nearest multiple of $1,000. 

19 ‘‘(ii) PHASEOUT AMOUNT.—If the 

20 amount in paragraph (2) as increased 

21 under subparagraph (A) is not a multiple 

22 of $10,000, such amount shall be rounded 

23 to the nearest multiple of $10,000.’’. 
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1 (e) REVOCATION OF ELECTION.—Paragraph (2) of 

2 section 179(c) (relating to election irrevocable) is amended 

3 to read as follows: 

4 ‘‘(2) REVOCATION OF ELECTION.—The tax5 payer may revoke an election under paragraph (1), 

6 and any specification contained in any such election, 

7 with respect to any property. Such revocation, once 

8 made, shall be irrevocable.’’. 

9 (f) EFFECTIVE DATE.—The amendments made by 

10 this section shall apply to taxable years beginning after 

11 December 31, 2002. 

12 SEC. 107. MINIMUM TAX RELIEF TO INDIVIDUALS. 

13 (a) IN GENERAL.—So much of paragraph (1) of sec14 tion 55(d) (relating to exemption amount for taxpayers 

15 other than corporations) as precedes subparagraph (C) 

16 thereof is amended to read as follows: 

17 ‘‘(1) EXEMPTION AMOUNT FOR TAXPAYERS

18 OTHER THAN CORPORATIONS.—In the case of a tax19 payer other than a corporation, the term ‘exemption 

20 amount’ means as follows: 

21 ‘‘(A) JOINT RETURN AND SURVIVING

22 SPOUSE.—In the case of a joint return or a sur23 viving spouse, the amount under the following 

24 table:

‘‘In the case of taxable years beginning: The exemption amount is: 

Before 2001 ................................................................................. $45,000
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‘‘In the case of taxable years beginning: The exemption amount is: 

In 2001 and 2002 ........................................................................ $49,000

In 2003, 2004, and 2005 ............................................................ $57,000

After 2005 ................................................................................... $45,000.

1 ‘‘(B) INDIVIDUAL NOT MARRIED AND NOT

2 A SURVIVING SPOUSE.—In the case of an indi3 vidual who is not a married individual and is 

4 not a surviving spouse, the amount under the 

5 following table:

‘‘In the case of taxable years beginning: The exemption amount is: 

Before 2001 ................................................................................. $33,750

In 2001 and 2002 ........................................................................ $35,750

In 2003, 2004, and 2005 ............................................................ $39,750

After 2005 ................................................................................... $33,750.’’.

6 (b) CONFORMING AMENDMENTS.—

7 (1) Section 55(d)(1)(C) is amended—

8 (A) by striking ‘‘, and’’ and inserting a pe9 riod, and 

10 (B) by striking ‘‘50 percent’’ and inserting 

11 ‘‘MARRIED INDIVIDUAL FILING A SEPARATE RE12 TURN.—50 percent’’. 

13 (2) Section 55(d)(1)(D) is amended by striking 

14 ‘‘$22,500’’ and inserting ‘‘ESTATE AND TRUST.—

15 $22,500’’. 

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

17 this section shall apply to taxable years beginning after 

18 December 31, 2002. 
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1 SEC. 108. APPLICATION OF EGTRRA SUNSET TO THIS TITLE. 

2 Each amendment made by this title (other than sec3 tion 106) shall be subject to title IX of the Economic 

4 Growth and Tax Relief Reconciliation Act of 2001 to the 

5 same extent and in the same manner as the provision of 

6 such Act to which such amendment relates.

7 TITLE II—DIVIDEND EXCLUSION 

8 TO ELIMINATE DOUBLE TAX9 ATION OF CORPORATE EARN10 INGS 

11 SEC. 201. DIVIDEND EXCLUSION TO ELIMINATE DOUBLE 

12 TAXATION OF CORPORATE EARNINGS. 

13 (a) IN GENERAL.—Part III of subchapter B of chap14 ter 1 is amended by inserting after section 115 the fol15 lowing new section:

16 ‘‘SEC. 116. DIVIDEND EXCLUSION TO ELIMINATE DOUBLE 

17 TAXATION OF CORPORATE EARNINGS. 

18 ‘‘(a) EXCLUSION.—Gross income does not include the 

19 excludable portion (as defined in section 281) of any 

20 amount received as a dividend. 

21 ‘‘(b) COMPARABLE TREATMENT FOR RETAINED

22 EARNINGS.—If the excludable dividend amount (as de23 fined in section 281) of any corporation for any calendar 

24 year exceeds the dividends paid by the corporation in such 

25 calendar year, the basis of stock in the corporation shall
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1 be increased in the manner and to the extent provided in 

2 section 282. 

3 ‘‘(c) REPORTING TO SHAREHOLDERS.—For reporting 

4 to shareholders, see section 6042.’’ 

5 (b) CLERICAL AMENDMENT.—The table of sections 

6 for such part III is amended by inserting after the item 

7 relating to section 115 the following new item:

‘‘Sec. 116. Dividend exclusion to eliminate double taxation of corporate earnings.’’

8 SEC. 202. RULES FOR APPLICATION OF DIVIDEND EXCLU9 SION AND RETAINED EARNINGS BASIS AD10 JUSTMENTS. 

11 (a) IN GENERAL.—Subchapter B of chapter 1 (as 

12 amended by subsection (d)) is amended by inserting after 

13 part IX the following new part: 

14 ‘‘PART X—RULES FOR APPLICATION OF DIVI15 DEND EXCLUSION AND RETAINED EARNINGS 

16 BASIS ADJUSTMENTS.

‘‘Sec. 281. Excludable portion of dividends. 

‘‘Sec. 282. Retained earnings basis adjustments. 

‘‘Sec. 283. Treatment of distributions after previous retained 

earnings basis adjustments. 

‘‘Sec. 284. Special rules for credits and refunds. 

‘‘Sec. 285. Special rules for foreign corporations and shareholders. 

‘‘Sec. 286. Other special rules. 

‘‘Sec. 287. Regulations.

17 ‘‘SEC. 281. EXCLUDABLE PORTION OF DIVIDENDS. 

18 ‘‘(a) EXCLUDABLE PORTION.—For purposes of sec19 tion 116, the term ‘excludable portion’ means, with respect 

20 to any dividend paid by a corporation in a calendar year, 
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1 an amount which bears the same ratio to such dividend 

2 as the excludable dividend amount of such corporation for 

3 the calendar year bears to the total amount of dividends 

4 paid by such corporation in such calendar year. 

5 ‘‘(b) EXCLUDABLE DIVIDEND AMOUNT.—For pur6 poses of this part and section 116—

7 ‘‘(1) IN GENERAL.—The term ‘excludable divi8 dend amount’ means, with respect to any corpora9 tion for any calendar year, the excess of—

10 ‘‘(A) the sum of—

11 ‘‘(i) the fully taxed earnings amount 

12 for the preceding calendar year, 

13 ‘‘(ii) the aggregate amount of divi14 dends received by the corporation during 

15 such preceding year which are excluded 

16 from gross income under section 116(a), 

17 and 

18 ‘‘(iii) the aggregate amount of in19 creases during such preceding year under 

20 section 116(b) in the basis of stock held by 

21 the corporation, over 

22 ‘‘(B) the amount of applicable income tax 

23 taken into account under subparagraph (A)(i). 

24 ‘‘(2) CARRYOVER OF EXCESS OF EXCLUDABLE

25 DIVIDEND AMOUNT OVER EARNINGS AND PROFITS.—
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1 The excludable dividend amount of a corporation for 

2 any calendar year shall be increased by the excess 

3 of—

4 ‘‘(A) the excludable dividend amount of 

5 such corporation for the preceding calendar 

6 year, over 

7 ‘‘(B) the maximum amount which could 

8 have been paid by the corporation as dividends 

9 during such preceding calendar year. 

10 ‘‘(c) FULLY TAXED EARNINGS AMOUNT.—

11 ‘‘(1) IN GENERAL.—The fully taxed earnings 

12 amount for any calendar year is the amount of the 

13 applicable income tax shown on applicable returns 

14 for such year divided by the highest rate of tax spec15 ified in section 11. 

16 ‘‘(2) INCREASE FOR PRIOR YEAR ASSESS17 MENTS.—The fully taxed earnings amount for any 

18 calendar year shall be increased by the amount of 

19 any applicable income tax (not previously taken into 

20 account under paragraph (1)) which is assessed dur21 ing such year divided by the highest rate of tax spec22 ified in section 11. 

23 ‘‘(3) LIMITATION TO AMOUNT PAID.—If an 

24 amount described in paragraph (1) or (2) is paid 

25 after the close of the calendar year in which such 
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1 amount would (but for this paragraph) be taken into 

2 account, such amount shall be taken into account for 

3 the calendar year in which paid. 

4 ‘‘(4) HIGHEST RATE OF TAX.—For purposes of 

5 this subsection, the highest rate of tax specified in 

6 section 11 with respect to any applicable income tax 

7 shall be such highest rate for the taxable year for 

8 which (or by reference to which) such tax is deter9 mined. 

10 ‘‘(d) DEFINITIONS.—For purposes of this part—

11 ‘‘(1) APPLICABLE INCOME TAX.—

12 ‘‘(A) IN GENERAL.—The term ‘applicable 

13 income tax’ means the excess (if any) of—

14 ‘‘(i) the sum of the taxes imposed by 

15 sections 11, 55, 511, 801, 831, 882, 1201, 

16 1291 (without regard to section 

17 1291(c)(1)(B)), and 1374, over 

18 ‘‘(ii) the sum of the credits under part 

19 IV of subchapter A (other than subpart C 

20 and section 27(a)). 

21 ‘‘(B) TRANSITIONAL RULES.—

22 ‘‘(i) IN GENERAL.—Such term shall 

23 not include any tax imposed for any tax24 able year ending before April 1, 2001.
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1 ‘‘(ii) TREATMENT OF MINIMUM TAX

2 CREDIT.—The applicable income tax shall 

3 not be reduced by the credit under section 

4 53 attributable (determined as if such 

5 credit were used on a first-in first-out 

6 basis) to taxable years ending before April 

7 1, 2001. 

8 ‘‘(iii) SECTION 1374.—The reference 

9 to section 1374 in subparagraph (A)(i) 

10 shall not apply to taxable years beginning 

11 before January 1, 2003. 

12 ‘‘(iv) OTHER TAXES INCLUDED.—The 

13 taxes imposed by sections 531 and 541 (as 

14 in effect before their repeal) shall be taken 

15 into account under subparagraph (A)(i) for 

16 taxable years ending after March 30, 2001, 

17 and beginning before January 1, 2003. 

18 ‘‘(2) APPLICABLE RETURN.—

19 ‘‘(A) IN GENERAL.—The term ‘applicable 

20 return’ means, with respect to a calendar year, 

21 any return of applicable income tax for a tax22 able year if the 15th day of the 8th month fol23 lowing the close of such taxable year occurs 

24 during such calendar year. 
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1 ‘‘(B) FILING REQUIREMENT.—If a return 

2 is filed after the close of the calendar year with 

3 respect to which such return would (but for this 

4 subparagraph) be treated as an applicable re5 turn under subparagraph (A), such return shall 

6 be treated as an applicable return for the cal7 endar year in which filed. 

8 ‘‘SEC. 282. RETAINED EARNINGS BASIS ADJUSTMENTS. 

9 ‘‘(a) IN GENERAL.—If any portion of the excess de10 scribed in section 116(b) is allocated to a share of stock 

11 in a corporation under subsection (b), the basis of such 

12 share shall be increased by the amount so allocated. 

13 ‘‘(b) ALLOCATION OF EXCESS.—

14 ‘‘(1) IN GENERAL.—A corporation may allocate 

15 the excess described in section 116(b) for any cal16 endar year to shares of stock in the corporation at 

17 1 or more times during the calendar year to the ex18 tent that cash in the amount of such excess, if dis19 tributed at the time of such allocation, would be a 

20 dividend. 

21 ‘‘(2) MANNER.—Except as provided in regula22 tions prescribed by the Secretary, any amount allo23 cated under paragraph (1) shall be allocated in the 

24 same manner as if cash in such amount were actu25 ally distributed as dividends. No allocation shall be 
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1 effective before the date on which it is made by the 

2 corporation. 

3 ‘‘(3) EXCEPTION FOR CERTAIN PREFERRED

4 STOCK.—No amount may be allocated under this 

5 subsection to stock described in section 1504(a)(4) 

6 (determined without regard to subparagraph (A) 

7 thereof). 

8 ‘‘(c) EFFECT ON EARNINGS AND PROFITS.—Earn9 ings and profits of a corporation making an allocation 

10 under subsection (b), and of a corporation receiving such 

11 an allocation, shall be adjusted in the same manner as 

12 if the allocation were treated as a dividend. 

13 ‘‘(d) AUTHORITY TO ALLOW CARRYOVER OF

14 UNALLOCATED EXCESS EXCLUDABLE DIVIDEND

15 AMOUNT.—Notwithstanding section 281, the Secretary 

16 may by regulation allow a corporation to increase the ex17 cludable dividend amount for any calendar year by the 

18 amount of the excess described in section 116(b) for the 

19 preceding calendar year which is not allocated under sub20 section (b). 

21 ‘‘SEC. 283. TREATMENT OF DISTRIBUTIONS AFTER PRE22 VIOUS RETAINED EARNINGS BASIS ADJUST23 MENTS. 

24 ‘‘(a) TREATMENT OF DISTRIBUTIONS.—
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1 ‘‘(1) IN GENERAL.—If a corporation makes dis2 tributions described in section 301(a) with respect to 

3 any class of stock in any calendar year which are 

4 not excludable under section 116(a), such distribu5 tions shall not be treated as dividends (and para6 graphs (2) and (3) of section 301(c) shall apply to 

7 such distributions) to the extent such distributions 

8 do not exceed the corporation’s cumulative retained 

9 earnings basis adjustment amount for such class as 

10 of the beginning of such year. If such distributions 

11 exceed such amount, this paragraph shall be applied 

12 to a proportionate share of each such distribution. 

13 ‘‘(2) SPECIAL RULES FOR RECHARACTERIZED

14 DIVIDENDS.—If any dividend (determined without 

15 regard to this subsection) during any calendar year 

16 with respect to any class of stock in a corporation 

17 is treated as a distribution other than a dividend 

18 under paragraph (1), such treatment shall be dis19 regarded for purposes of—

20 ‘‘(A) determining the excludable portion 

21 under section 281 of dividends paid by the cor22 poration during the calendar year, and 

23 ‘‘(B) determining whether any distribution 

24 during the calendar year with respect to stock 

25 in the corporation is treated as a dividend.
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1 ‘‘(b) CUMULATIVE RETAINED EARNINGS BASIS AD2 JUSTMENT AMOUNT.—For purposes of this section, the 

3 term ‘cumulative retained earnings basis adjustment 

4 amount’ means, with respect to any class of stock for any 

5 calendar year, the excess (if any) of—

6 ‘‘(1) the aggregate of the excess described in 

7 section 116(b) allocated to shares of such class of 

8 stock under section 282 for all preceding calendar 

9 years, over 

10 ‘‘(2) the aggregate amount of distributions to 

11 which subsection (a)(1) applies with respect to such 

12 class of stock for all preceding calendar years. 

13 ‘‘SEC. 284. SPECIAL RULES FOR CREDITS AND REFUNDS. 

14 ‘‘(a) IN GENERAL.—No overpayment of an applicable 

15 income tax may be allowed as a credit or refund to the 

16 extent that the overpayment exceeds the sum of—

17 ‘‘(1) the aggregate applicable income taxes for 

18 the calendar year in which the credit or refund 

19 would otherwise be allowed or made, and 

20 ‘‘(2) an amount equal to the lesser of—

21 ‘‘(A) the product of the corporation’s ex22 cludable dividend amount for such calendar 

23 year and the fraction the numerator of which is 

24 the highest rate of tax specified in section 11 

25 (within the meaning of section 281(c)(4)) and 
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1 the denominator of which is 1 minus such high2 est rate, or 

3 ‘‘(B) the amount specified by the corpora4 tion for purposes of this paragraph. 

5 ‘‘(b) ADJUSTMENTS TO EXCLUDABLE DIVIDEND

6 AMOUNTS RESULTING FROM CREDITS AND REFUNDS.—

7 If subsection (a) applies to any credit or refund which is 

8 allowed or made in a calendar year—

9 ‘‘(1) the applicable income taxes described in 

10 subsection (a)(1) otherwise taken into account under 

11 section 281 for determining the excludable dividend 

12 amount for the succeeding calendar year shall be re13 duced (but not below zero) by the amount of the 

14 credit or refund, and 

15 ‘‘(2) the excludable dividend amount for the cal16 endar year shall be reduced by the excess of—

17 ‘‘(A) the amount determined under sub18 section (a)(2) divided by the highest rate of tax 

19 specified in section 11, over 

20 ‘‘(B) the amount determined under sub21 section (a)(2). 

22 ‘‘(c) DISALLOWED OVERPAYMENT NOT LOST.—

23 Nothing in subsection (a) shall be construed to reduce the 

24 amount of any overpayment for which credit or refund is 

25 not allowed by reason of subsection (a), and such overpay-
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1 ment shall continue to be taken into account in applying 

2 subsection (a) for succeeding calendar years until a credit 

3 or refund is allowed or made. 

4 ‘‘(d) EXCEPTION FOR FOREIGN TAX CREDIT.—This 

5 section shall not apply to any overpayment to the extent 

6 that such overpayment is attributable to the credit allowed 

7 under section 27(a). 

8 ‘‘(e) DENIAL OF INTEREST.—No interest shall be al9 lowed on any overpayment during the period that credit 

10 or refund of such overpayment is not allowed by reason 

11 of this section. 

12 ‘‘SEC. 285. SPECIAL RULES FOR FOREIGN CORPORATIONS 

13 AND SHAREHOLDERS. 

14 ‘‘(a) COMPUTATION OF EXCLUDABLE DIVIDEND

15 AMOUNTS OF FOREIGN CORPORATIONS.—

16 ‘‘(1) REDUCTION IN EXCLUDABLE DIVIDEND

17 AMOUNT FOR CERTAIN TAXES.—The reduction 

18 under section 281(b)(1)(B) (without regard to this 

19 subparagraph) shall be increased by the sum of—

20 ‘‘(A) the taxes imposed by section 884 (re21 lating to branch profits tax), and 

22 ‘‘(B) so much of the taxes imposed by sec23 tion 881 as are attributable to dividends which 

24 would (but for subsection (b)) be excludable 

25 under section 116 or are attributable to dis-
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1 tributions which are described in section 

2 283(a). 

3 ‘‘(2) TREATMENT OF DISALLOWED EXCLUSIONS

4 AND ADJUSTMENTS.—Notwithstanding subsection 

5 (b)—

6 ‘‘(A) the excludable dividend amount of a 

7 foreign corporation for a calendar year shall be 

8 increased by—

9 ‘‘(i) the dividends received by the cor10 poration which (but for subsection (b)) 

11 would be excludable under section 116(a), 

12 and 

13 ‘‘(ii) the distributions received by such 

14 corporation during such year which are de15 scribed in section 283(a), and 

16 ‘‘(B) the earnings and profits of a foreign 

17 corporation—

18 ‘‘(i) shall be increased by the amount 

19 described in subparagraph (A)(ii), and 

20 ‘‘(ii) shall not be increased by any ex21 cess described in section 116(b) allocated 

22 to such corporation for which an increase 

23 in basis is not allowed by reason of sub24 section (b)(2).
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1 ‘‘(b) TAXATION OF FOREIGN SHAREHOLDERS.—In 

2 the case of a shareholder who is a nonresident alien indi3 vidual or a foreign corporation—

4 ‘‘(1) no dividends shall be excludable under sec5 tion 116(a), 

6 ‘‘(2) there shall be no increase in basis for any 

7 excess described in section 116(b) allocated to such 

8 individual or corporation under section 282, and 

9 ‘‘(3) any distribution described in section 283 

10 shall be treated as a dividend for purposes of sec11 tions 871 and 881 and chapter 3. 

12 ‘‘(c) RULES RELATING TO FOREIGN TAX CREDIT.—

13 ‘‘(1) IN GENERAL.—No credit shall be allowed 

14 under section 901 for any taxes paid or accrued (or 

15 deemed paid under section 902 or 960) with respect 

16 to any dividend excludable under section 116 and 

17 any distribution described in section 283(a). 

18 ‘‘(2) EXCLUDABLE DIVIDEND AMOUNT.—The 

19 excludable dividend amount of a corporation for any 

20 calendar year shall be determined without regard to 

21 a reduction in the credit allowed by section 27(a) on 

22 an applicable return for a prior calendar year. 

23 ‘‘SEC. 286. OTHER SPECIAL RULES. 

24 ‘‘(a) REDEMPTIONS.—If a corporation makes a dis25 tribution to a shareholder during any calendar year with 
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1 respect to its stock and section 301 does not apply to such 

2 distribution, the excludable dividend amount for the cal3 endar year, and the cumulative retained earnings basis ad4 justment amount as of the beginning of the calendar year 

5 in which the distribution is made, shall be reduced by the 

6 ratable share of such amounts attributable to the stock 

7 so redeemed. 

8 ‘‘(b) COORDINATION WITH SECTION 246(C).—

9 ‘‘(1) HOLDING PERIOD REQUIREMENTS.—If a 

10 shareholder disposes of any share of stock before the 

11 holding period requirements of section 246(c) are 

12 met—

13 ‘‘(A) the basis of such share shall be re14 duced by the amount of dividends received with 

15 respect to such share which are excludable 

16 under section 116(a), and 

17 ‘‘(B) there shall be no increase in basis for 

18 any excess described in section 116(b) allocated 

19 to the shareholder of such stock under section 

20 282. 

21 ‘‘(2) RELATED PAYMENTS.—No deduction shall 

22 be allowed under this chapter for any related pay23 ments described in section 246(c)(1)(B) with respect 

24 to any dividend excludable under section 116(a) or 

25 basis increase under section 116(b) with respect to 
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1 any share of stock to the extent that such payments 

2 do not exceed the amount of such dividend or basis 

3 increase. 

4 ‘‘(3) TREATMENT OF DISALLOWED EXCLUSIONS

5 AND ADJUSTMENTS.—The excludable dividend 

6 amount of any corporation for a calendar year, and 

7 its earnings and profits, shall not be increased by—

8 ‘‘(A) the dividends received by the corpora9 tion which are excludable under section 116(a) 

10 and which resulted in a basis reduction under 

11 paragraph (1)(A), and 

12 ‘‘(B) the aggregate increases in basis 

13 which (but for paragraph (1)(B)) would be 

14 made in stock held by the corporation. 

15 ‘‘(c) TREATMENT OF REGULATED INVESTMENT COM16 PANIES AND REAL ESTATE INVESTMENT TRUSTS.—

17 ‘‘(1) IN GENERAL.—Except as provided in regu18 lations, the excludable dividend amount of a regu19 lated investment company or real estate investment 

20 trust shall be zero. 

21 ‘‘(2) CROSS REFERENCE.—

‘‘For special rules relating to application of this 

part to regulated investment companies and real estate investment trusts, see section 852(g).

22 ‘‘(d) EXCLUSION AND BASIS ALLOCATION REDUCED

23 WHERE PORTFOLIO STOCK HELD BY CORPORATION IS

24 DEBT-FINANCED.—
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1 ‘‘(1) TREATMENT OF EXCLUDABLE DIVI2 DEND.—In the case of any debt-financed portfolio 

3 stock (within the meaning of section 246A), the 

4 amount excluded under section 116(a) with respect 

5 to any dividend received with respect to such stock 

6 shall be an amount equal to the product of—

7 ‘‘(A) the amount which would be excluded 

8 under section 116(a) without regard to this 

9 paragraph, and 

10 ‘‘(B) 100 percent minus the average in11 debtedness percentage (within the meaning of 

12 section 246A(d)). 

13 ‘‘(2) TREATMENT OF BASIS INCREASE.—In the 

14 case of any debt-financed portfolio stock (within the 

15 meaning of section 246A) with respect to which 

16 there is an increase in basis under section 116(b) 

17 during any taxable year, the gross income of the tax18 payer shall be increased by an amount equal to the 

19 product of—

20 ‘‘(A) the amount of the increase under sec21 tion 116(b), and 

22 ‘‘(B) the average indebtedness percentage 

23 (within the meaning of section 246A(d)). 

24 ‘‘(3) LIMITATION.—The aggregate amount of 

25 reductions under paragraph (1) and increases in
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1 gross income under paragraph (2) with respect to 

2 any debt-financed portfolio stock shall not exceed the 

3 amount of interest deduction (including any deduct4 ible short sale expense) allocable to such stock. 

5 ‘‘(4) TREATMENT OF INCREASE IN GROSS IN6 COME.—The excludable dividend amount of a cor7 poration for a calendar year shall not be increased 

8 by reason of any increase in gross income under 

9 paragraph (2). 

10 ‘‘(5) EXCEPTION.—This subsection shall not 

11 apply to any dividend described in paragraph (1) or 

12 (2) of section 246A(b). 

13 ‘‘(e) COOPERATIVES.—In the case of a cooperative to 

14 which subchapter T applies—

15 ‘‘(1) the excludable dividend amount of such co16 operative shall be allocated for purposes of section 

17 116 and this part between shares of such coopera18 tive held by patrons and shares held by other per19 sons in such manner as the Secretary shall prescribe 

20 by regulations, and 

21 ‘‘(2) no deduction shall be allowed to the coop22 erative under this chapter for any dividend paid to 

23 a patron which is excludable under section 116(a) or 

24 for any distribution described in section 283(a) 
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1 which reduced the basis of stock held by the cooper2 ative under section 301(c)(2). 

3 ‘‘(f) ESOP STOCK.—Any dividend allowed as a de4 duction under section 404(k) shall not be treated as a divi5 dend for purposes of section 116 and this part, and any 

6 stock with respect to which such a dividend may be paid 

7 shall not be taken into account in making any allocation 

8 under 282 or any distribution described in section 283(a). 

9 ‘‘SEC. 287. REGULATIONS. 

10 ‘‘The Secretary shall prescribe such regulations as 

11 may be appropriate to carry out section 116 and this part, 

12 including regulations—

13 ‘‘(1) providing for the treatment of options and 

14 convertible debt as stock, including modification of 

15 the attribution rules under section 318(a)(4), 

16 ‘‘(2) providing for the allocation of the exclud17 able dividend amount and the cumulative retained 

18 earnings basis adjustment amount in the case of 

19 transactions described in section 312(h), 

20 ‘‘(3) waiving the application of section 

21 246(c)(4) for purposes of sections 286(b) and 

22 1059(g), 

23 ‘‘(4) modifying the consolidated return regula24 tions to the extent necessary or appropriate to apply 

25 the provisions of this part, including regulations that 
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1 accelerate the inclusion in the excludable dividend 

2 amount of a higher-tier member with respect to—

3 ‘‘(A) activities of lower-tier members of the 

4 group, 

5 ‘‘(B) dividends excludable under section 

6 116(a) received from such lower-tier members, 

7 and 

8 ‘‘(C) increases in basis allocated under sec9 tion 282 to stock in such lower-tier members, 

10 ‘‘(5) providing for the application of section 116 

11 and this part in the case of pass-thru entities, in12 cluding appropriate adjustments to basis, and 

13 ‘‘(6) as are necessary to further the purposes of 

14 section 116 and this part and to prevent the cir15 cumvention of such purposes. 

16 Any regulations under paragraph (4) may be effective as 

17 of the effective date of this part.’’

18 (b) REPORTING OF EXCLUDABLE DIVIDENDS AND

19 RETAINED EARNINGS BASIS ADJUSTMENTS.—

20 (1) IN GENERAL.—Section 6042(a) (relating to 

21 returns regarding payments of dividends and cor22 porate earnings and profits) is amended to read as 

23 follows: 

24 ‘‘(a) REQUIREMENT OF REPORTING.—

25 ‘‘(1) IN GENERAL.—Every person—
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1 ‘‘(A) who makes payments of dividends ag2 gregating $10 or more to any other person dur3 ing any calendar year, 

4 ‘‘(B) who allocates under section 282 in5 creases in basis of stock in a corporation aggre6 gating $10 or more to any other person during 

7 any calendar year, 

8 ‘‘(C) who makes distributions described in 

9 section 283(a) aggregating $10 or more to any 

10 other person during any calendar year, or 

11 ‘‘(D) who receives such payments of divi12 dends, allocations of increases in basis, or dis13 tributions as a nominee and who makes pay14 ments or allocates increases aggregating $10 or 

15 more during any calendar year to any other 

16 person with respect to the dividends, alloca17 tions, or distributions received, 

18 shall make a return at the time and in the manner 

19 prescribed by the Secretary, setting forth the infor20 mation described in paragraph (3). 

21 ‘‘(2) RETURNS REQUIRED BY SECRETARY.—

22 Every person who makes payments of dividends, al23 locations under section 282, or distributions de24 scribed in section 283(a) to which paragraph (1) 

25 does not apply shall, when required by the Secretary,
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1 make a return setting forth the information de2 scribed in paragraph (3). 

3 ‘‘(3) INFORMATION REPORTED.—Information 

4 described in this paragraph includes—

5 ‘‘(A) the aggregate amount of dividends, 

6 including the portion of such amount excludable 

7 from gross income under section 116(a), 

8 ‘‘(B) the amount of each allocation of basis 

9 under section 282 with respect to each share of 

10 stock and the date of such increase, 

11 ‘‘(C) the amount of each distribution de12 scribed in section 283(a), including the portion 

13 of such amount to which paragraph (2) or (3) 

14 of section 301(c) applies and the date of such 

15 distribution, and 

16 ‘‘(D) such other information as the Sec17 retary may require. 

18 In the case of a nominee described in paragraph 

19 (1)(D), this paragraph shall apply with respect to 

20 the payments and allocations made by the nominee.’’ 

21 (2) APPLICATION TO FOREIGN PERSONS.—Sec22 tion 6042 is amended by adding at the end the fol23 lowing new subsection: 

24 ‘‘(e) APPLICATION TO FOREIGN PERSONS.—The Sec25 retary may provide for the application of this section to 
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1 payments, allocations, and distributions made by or to a 

2 foreign person to the extent necessary to carry out the 

3 provisions of section 116 and part X of subchapter B of 

4 chapter 1.’’

5 (3) CONFORMING AMENDMENTS.—

6 (A) Section 6042(b)(3) is amended by 

7 striking ‘‘or (B)’’ and inserting ‘‘or (D)’’. 

8 (B) Section 6042(c)(2) is amended to read 

9 as follows: 

10 ‘‘(2) the information described in subsection 

11 (a)(3) required to be shown on the return.’’

12 (c) AMENDMENTS TO OTHER SECTIONS.—

13 (1) MINIMUM TAX.—Clause (i) of section 

14 56(g)(4)(B) is amended by striking ‘‘or under sec15 tion 114’’ and inserting ‘‘, section 114, or section 

16 116’’. 

17 (2) COORDINATION WITH DIVIDEND RECEIVED

18 DEDUCTIONS.—

19 (A) Section 246 is amended by adding at 

20 the end the following new subsection: 

21 ‘‘(f) COORDINATION WITH DIVIDEND EXCLUSION.—

22 No deduction shall be allowed under section 243, 244, or 

23 245 with respect to the amount of any dividend excluded 

24 from gross income under section 116 or would be so ex25 cluded but for sections 285(b)(1) and 286(d).’’
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1 (B) Section 243 is amended by adding at 

2 the end the following new subsection: 

3 ‘‘(f) TERMINATION.—Paragraph (1) of subsection (a) 

4 shall not apply to any dividend—

5 ‘‘(1) paid from earnings and profits accumu6 lated in taxable years ending after April 1, 2001, 

7 ‘‘(2) made with respect to stock issued after 

8 February 2, 2003, or 

9 ‘‘(3) received by a corporation after December 

10 31, 2005.’’

11 (3) CARRYOVERS IN CERTAIN CORPORATION AC12 QUISITIONS.—Section 381(c) is amended by adding 

13 at the end the following new paragraph: 

14 ‘‘(27) EDA AND CREBAA.—The acquiring cor15 poration shall take into account (to the extent prop16 er to carry out the purposes of this section, section 

17 116, and part X of subchapter B, and under such 

18 regulation as may be prescribed by the Secretary) 

19 the excludable dividend amount and the cumulative 

20 retained earnings basis adjustment amount in re21 spect of the distributor or transferor.’’

22 (4) TRUSTS AND ESTATES.—Subsection (a) of 

23 section 643 is amended—
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1 (A) by redesignating paragraph (7) as 

2 paragraph (8) and by inserting after paragraph 

3 (6) the following new paragraph: 

4 ‘‘(7) DIVIDENDS, ETC.—There shall be included 

5 the amount of any dividends excluded from gross in6 come under section 116 and the amount of any dis7 tribution described in section 283.’’, and 

8 (B) by striking ‘‘and (6)’’ in the last sen9 tence and inserting ‘‘, (6), and (7)’’. 

10 (5) PARTNERSHIPS.—

11 (A) Paragraph (5) of section 702(a) is 

12 amended to read as follows: 

13 ‘‘(5) dividends with respect to which there is an 

14 exclusion under section 116 or a deduction under 

15 part VIII of subchapter B,’’. 

16 (B) Section 705(a)(1) is amended by strik17 ing ‘‘and’’ at the end of subparagraph (B), by 

18 striking the semicolon at the end of subpara19 graph (C) and inserting ‘‘, and’’, and by adding 

20 at the end the following new subparagraph: 

21 ‘‘(D) increases in basis under section 

22 116(b) allocated to the partnership;’’. 

23 (6) EXTRAORDINARY DIVIDENDS.—

24 (A) IN GENERAL.—Section 1059 is amend25 ed by redesignating subsection (g) as subsection
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1 (h) and by inserting after subsection (f) the fol2 lowing new subsection: 

3 ‘‘(g) TREATMENT OF EXCLUDABLE DIVIDENDS AND

4 RETAINED EARNINGS BASIS ADJUSTMENTS AS EXTRAOR5 DINARY DIVIDENDS.—

6 ‘‘(1) IN GENERAL.—For purposes of this sec7 tion, any dividend excludable under section 116(a) 

8 or increase in basis under section 116(b) shall be 

9 treated as an extraordinary dividend, except that 

10 this section shall be applied by substituting ‘1 year 

11 (or such other period as the Secretary may pre12 scribe)’ for ‘2 years’ each place it appears. 

13 ‘‘(2) TREATMENT OF DEEMED EXTRAORDINARY

14 DIVIDENDS.—The excludable dividend amount of 

15 any corporation for a calendar year, and its earnings 

16 and profits, shall not be increased by—

17 ‘‘(A) the dividends received by the corpora18 tion which are treated as extraordinary divi19 dends by reason of paragraph (1), and 

20 ‘‘(B) the aggregate increases in basis 

21 under section 116(b) which are so treated. 

22 ‘‘(3) REGULATIONS.—The Secretary may by 

23 regulation provide for exceptions to the application 

24 of paragraph (1).’’
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1 (B) Paragraph (3) of section 1059(d) is 

2 amended by inserting ‘‘section 1223(11) shall 

3 not apply and’’ after ‘‘subsection (a),’’. 

4 (C)(i) Section 1059 is amended by striking 

5 ‘‘corporation’’ each place it appears in sub6 section (a) and inserting ‘‘taxpayer’’. 

7 (ii) The section heading for section 1059 is 

8 amended by striking ‘‘CORPORATE’’ and by in9 serting ‘‘AND EXCLUDABLE’’ before ‘‘DIVI10 DENDS’’. 

11 (iii) The item relating to section 1059 in 

12 the table of sections for part IV of subchapter 

13 O of chapter 1 is amended by striking ‘‘cor14 porate’’ and by inserting ‘‘and excludable’’ be15 fore ‘‘dividends’’. 

16 (7) PRIVATE FOUNDATIONS.—Section 4940(c) 

17 is amended by adding at the end the following new 

18 paragraph: 

19 ‘‘(6) COORDINATION WITH DIVIDEND EXCLU20 SION.—For purposes of this section, gross invest21 ment income shall not include—

22 ‘‘(A) a dividend to the extent excluded 

23 from gross income under section 116(a), and 

24 ‘‘(B) a distribution described in section 

25 283.’’
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1 (d) CONFORMING AMENDMENTS.—

2 (1)(A) Part X of subchapter B of chapter 1, as 

3 in effect on the day before the date of the enactment 

4 of this Act, is hereby moved after part XI of such 

5 subchapter B and redesignated as part XII. 

6 (B) Section 281, as so in effect, is redesignated 

7 as section 296. 

8 (C) The table of sections for such part XII, as 

9 so designated, is amended by striking ‘‘Sec. 281’’ 

10 and inserting ‘‘Sec. 296.’’

11 (D) The table of parts for subchapter B of 

12 chapter 1 is amended by striking the items relating 

13 to parts X and XI and inserting the following new 

14 items:

‘‘Part X. Rules for application of dividend exclusion and retained 

earnings basis adjustments. 

‘‘Part XI. Special rules relating to corporate preference items. 

‘‘Part XII. Terminal railroad corporations and their shareholders.’’

15 (2) Subsection (f) of section 301 is amended by 

16 adding at the end the following new paragraph: 

17 ‘‘(4) For exclusion from gross income of certain 

18 dividends, see section 116.’’

19 SEC. 203. TREATMENT OF REGULATED INVESTMENT COM20 PANIES AND REAL ESTATE INVESTMENT 

21 TRUSTS. 

22 (a) IN GENERAL.—Section 852 is amended by adding 

23 at the end the following new subsection: 
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1 ‘‘(g) SPECIAL RULES RELATING TO SECTION 116 

2 AND PART X OF SUBCHAPTER B.—

3 ‘‘(1) EXCLUDABLE PORTION.—

4 ‘‘(A) IN GENERAL.—For purposes of sec5 tion 116(a), the excludable portion of any divi6 dend paid by any qualified investment entity 

7 shall be the amount so designated by such enti8 ty in a written notice mailed to its shareholders 

9 not later than 60 days after the close of its tax10 able year in which such dividend is paid. 

11 ‘‘(B) LIMITATION.—If the aggregate 

12 amount so designated with respect to a taxable 

13 year (including dividends paid after the close of 

14 the taxable year as described in section 855) ex15 ceeds the aggregate amount of dividends re16 ceived by such entity during such year which 

17 are excludable from gross income under section 

18 116(a), then the amount of a dividend other19 wise excludable by reason of a designation 

20 under subparagraph (A) shall be reduced by an 

21 amount which bears the same ratio to the 

22 amount otherwise excludable as such excess 

23 bears to the total amount designated under sub24 paragraph (A).
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1 ‘‘(C) TREATMENT OF CAPITAL GAIN AND

2 EXEMPT-INTEREST DIVIDENDS.—Any amount 

3 designated under subparagraph (A) as exclud4 able under section 116 may not be treated as 

5 a capital gain dividend or an exempt-interest 

6 dividend. 

7 ‘‘(D) COORDINATION WITH SECTION 853.—

8 The election under section 853 shall not apply 

9 to dividends excludable under section 116 and 

10 distributions described in section 283(a) re11 ceived by a qualified investment entity. 

12 ‘‘(2) RETAINED EARNINGS BASIS ADJUST13 MENTS.—

14 ‘‘(A) IN GENERAL.—A qualified investment 

15 entity may allocate any increase in basis allo16 cated to the entity under section 282 to shares 

17 of stock in the entity at 1 or more times during 

18 the taxable year in the manner and the time 

19 prescribed in paragraphs (2) and (3) of section 

20 282(b). 

21 ‘‘(B) DESIGNATION.—For purposes of sec22 tion 116(b), the increase in basis allocated to 

23 any share of stock in the entity shall be the 

24 amount so designated by such entity in a writ25 ten notice mailed to its shareholders not later 
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1 than 60 days after the close of its taxable year 

2 in which such allocation is made. 

3 ‘‘(C) LIMITATION.—Rules similar to the 

4 rules of paragraph (1)(B) shall apply to 

5 amounts allocated under this paragraph. 

6 ‘‘(D) SHAREHOLDER TREATMENT OF

7 AMOUNTS DESIGNATED.—Shareholders of such 

8 entity who receive an allocation under this 

9 paragraph from such entity shall take into ac10 count such allocation as if it were an allocation 

11 under section 282. 

12 ‘‘(E) EARNINGS AND PROFITS.—Earnings 

13 and profits of the entity making such an alloca14 tion shall be adjusted in the same manner as 

15 provided in section 282(c). 

16 ‘‘(3) CERTAIN DISTRIBUTIONS AFTER PREVIOUS

17 RETAINED EARNINGS BASIS ADJUSTMENTS.—

18 ‘‘(A) IN GENERAL.—If any qualified in19 vestment entity receives during any taxable year 

20 distributions described in section 283(a) which 

21 reduced the basis of stock held by such entity 

22 under section 301(c)(2), the entity may des23 ignate any distributions described in section 

24 301(a) made by such entity in such taxable 

25 year which are not excludable under section 
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1 116(a) (after the application of paragraph (1)) 

2 as distributions described in section 283(a). 

3 Such designations shall be made in a written 

4 notice mailed to its shareholders not later than 

5 60 days after the close of its taxable year in 

6 which such distribution is made. 

7 ‘‘(B) LIMITATION.—If the aggregate 

8 amount so designated with respect to a taxable 

9 year (including distributions paid after the close 

10 of the taxable year as provided in section 

11 855(e)) exceeds the aggregate distributions de12 scribed in section 283(a) which reduced the 

13 basis of stock held by such entity under section 

14 301(c)(2) for such taxable year, then the 

15 amount of a distribution otherwise treated as a 

16 distribution described in section 283(a) by rea17 son of a designation under subparagraph (A) 

18 shall be reduced by an amount which bears the 

19 same ratio to the amount otherwise so treated 

20 as such excess bears to the total amount des21 ignated under subparagraph (A). 

22 ‘‘(C) SHAREHOLDER TREATMENT OF

23 AMOUNTS DESIGNATED.—Shareholders of such 

24 entity who receive a distribution from such enti25 ty which is designated under this paragraph 
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1 shall treat such distribution as a distribution 

2 described in section 283(a). 

3 ‘‘(D) TREATMENT OF CAPITAL GAIN AND

4 EXEMPT-INTEREST DIVIDENDS.—Any distribu5 tion designated under subparagraph (A) may 

6 not be treated as a capital gain dividend or an 

7 exempt-interest dividend. 

8 ‘‘(E) ADJUSTMENTS.—No adjustment shall 

9 be made in the earnings and profits of a quali10 fied investment entity with respect to a dis11 tribution by such entity which is designated 

12 under subparagraph (A). 

13 ‘‘(4) COORDINATION WITH DIVIDENDS PAID DE14 DUCTION.—No allocation or distribution designated 

15 under paragraph (2) or (3) shall be treated as a div16 idend for purposes of section 561. 

17 ‘‘(5) DEFINITIONS.—For purposes of this sub18 section—

19 ‘‘(A) QUALIFIED INVESTMENT ENTITY.—

20 The term ‘qualified investment entity’ means—

21 ‘‘(i) a regulated investment company, 

22 and 

23 ‘‘(ii) a real estate investment trust.
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1 ‘‘(B) EXEMPT-INTEREST DIVIDEND.—The 

2 term ‘exempt-interest dividend’ has the mean3 ing given to such term by subsection (b)(5).’’

4 (b) OTHER RULES RELATING TO REGULATED IN5 VESTMENT COMPANIES.—

6 (1) DISTRIBUTION REQUIREMENTS.—

7 (A) Clause (i) of section 852(a)(1)(B) is 

8 amended by inserting ‘‘and its dividend income 

9 excludable under section 116(a),’’ before 

10 ‘‘over’’. 

11 (B) Section 852(a) is amended by striking 

12 ‘‘and’’ at the end of paragraph (1), by redesig13 nating paragraph (2) as paragraph (3), and by 

14 inserting after paragraph (1) the following new 

15 paragraph: 

16 ‘‘(2) 90 percent of the distributions described in 

17 section 283(a)—

18 ‘‘(A) which are received by such company 

19 during the taxable year, and 

20 ‘‘(B) which reduce under section 301(c)(2) 

21 the basis of stock held by such company, 

22 are distributed during such year under subsection 

23 (g)(3)(A), and’’. 

24 (C) Section 855 is amended by adding at 

25 the end the following new subsection: 
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1 ‘‘(e) DISTRIBUTION OF PREVIOUSLY RETAINED

2 EARNINGS BASIS ADJUSTMENTS.—Rules similar to the 

3 rules of the preceding provisions of this section shall apply 

4 to distributions described in section 852(g)(3)(A).’’

5 (2) TAXATION OF ENTITY AND SHARE6 HOLDERS.—

7 (A) The material following paragraph (3) 

8 of section 851(b) is amended—

9 (i) by inserting ‘‘, dividends excludable 

10 from gross income under section 116(a), 

11 and distributions described in section 

12 283(a) which reduce the basis of stock 

13 under section 301(c)(2)’’ after ‘‘103(a)’’ in 

14 the third sentence, and 

15 (ii) by adding at the end the following 

16 new sentence: ‘‘For purposes of paragraph 

17 (2), distributions described in section 

18 283(a) which reduce the basis of stock 

19 under section 301(c)(2) shall be treated as 

20 dividends.’’

21 (B) Section 852(b)(2)(D) is amended by 

22 striking ‘‘and exempt-interest dividends’’ and 

23 inserting ‘‘, exempt-interest dividends, and any 

24 dividends excludable under section 116(a)’’. 
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1 (C) Subparagraph (B) of section 852(b)(4) 

2 is amended to read as follows: 

3 ‘‘(B) LOSS ATTRIBUTABLE TO EXEMPT

4 DIVIDENDS.—If—

5 ‘‘(i) a shareholder of a regulated in6 vestment company receives an exempt-in7 terest dividend, a dividend excludable 

8 under section 116(a), or an allocation 

9 under subsection (g)(2), with respect to 

10 any share, and 

11 ‘‘(ii) such share is held by the tax12 payer for 6 months or less, 

13 then any loss on the sale or exchange of such 

14 share shall, to the extent of the sum of the 

15 amounts of such dividends and allocations, be 

16 disallowed.’’

17 (D) Paragraph (3) of section 4982(c) is 

18 amended by striking ‘‘and’’ at the end of sub19 paragraph (A), by striking the period at the 

20 end of subparagraph (B) and inserting ‘‘, and’’, 

21 and by adding at the end the following new sub22 paragraph: 

23 ‘‘(C) any dividend excludable from gross 

24 income under section 116(a).’’
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1 (c) OTHER RULES RELATING TO REAL ESTATE IN2 VESTMENT TRUSTS.—

3 (1) DISTRIBUTION REQUIREMENTS.—

4 (A) Subparagraph (A) of section 857(a)(1) 

5 is amended by striking ‘‘and’’ at the end of 

6 clause (i), by striking ‘‘minus’’ at the end of 

7 clause (ii), and by inserting at the end the fol8 lowing new clause: 

9 ‘‘(iii) 90 percent of its dividend in10 come excludable under section 116(a); 

11 minus’’

12 (B) Subsection (a) of section 857 is 

13 amended by redesignating paragraph (2) as 

14 paragraph (3) and by inserting after paragraph 

15 (1) the following new paragraph: 

16 ‘‘(2) 90 percent of the distributions described in 

17 section 283(a)—

18 ‘‘(A) which are received by such trust dur19 ing the taxable year, and 

20 ‘‘(B) which reduce under section 301(c)(2) 

21 the basis of stock held by such trust, 

22 are distributed during such year under subsection 

23 (g)(3)(A); and’’. 

24 (C) Section 858 is amended by adding at 

25 the end the following new subsection:
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1 ‘‘(d) DISTRIBUTION OF PREVIOUSLY RETAINED

2 EARNINGS BASIS ADJUSTMENTS.—Rules similar to the 

3 rules of the preceding provisions of this section shall apply 

4 to distributions described in section 852(g)(3).’’

5 (2) TAXATION OF ENTITY AND SHARE6 HOLDERS.—

7 (A)(i) Section 856(c)(2) is amended—

8 (I) by inserting ‘‘(including dividends 

9 excludable from gross income under section 

10 116(a)) and distributions described in sec11 tion 283(a) which reduce the basis of stock 

12 under section 301(c)(2)’’ after ‘‘dividends’’ 

13 in subparagraph (A), and 

14 (II) by inserting ‘‘(including tax-ex15 empt interest)’’ after ‘‘interest’’ in sub16 paragraph (B). 

17 (ii) Section 856(c) is amended by adding 

18 at the end the following new paragraph: 

19 ‘‘(8) GROSS INCOME TESTS.—For purposes of 

20 paragraphs (2) and (3), gross income shall be treat21 ed as including tax-exempt interest, dividends ex22 cludable from gross income under section 116(a), 

23 and distributions described in section 283(a) which 

24 reduce the basis of stock under section 301(c)(2).’’
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1 (B) Section 857(b)(2)(B) is amended by 

2 inserting ‘‘ or any dividends paid which are ex3 cludable under section 116(a)’’ after ‘‘subpara4 graph (D)’’. 

5 (C) Section 857(b) is amended by adding 

6 at the end the following new paragraph: 

7 ‘‘(10) LOSS ATTRIBUTABLE TO EXEMPT DIVI8 DENDS.—If—

9 ‘‘(A) a shareholder of a real estate invest10 ment trust receives a dividend excludable under 

11 section 116(a) or an allocation under section 

12 852(g)(2) with respect to any share, and 

13 ‘‘(B) such share is held by the taxpayer for 

14 6 months or less, 

15 then any loss on the sale or exchange of such share 

16 shall, to the extent of the sum of the amounts of 

17 such dividends and allocations, be disallowed.’’

18 (D) Subsection (g) of section 857 is 

19 amended to read as follows: 

20 ‘‘(g) CROSS REFERENCES.—

21 ‘‘(1) For provisions relating to excise tax based 

22 on certain real estate investment trust taxable in23 come not distributed during the taxable year, see 

24 section 4981. 
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1 ‘‘(2) For special rules relating to application of 

2 dividend exclusion and retained earnings basis ad3 justments, see section 852(g).’’

4 (E) Paragraph (1) of section 4981(c) is 

5 amended by striking ‘‘and’’ at the end of sub6 paragraph (A), by striking the period at the 

7 end of subparagraph (B) and inserting ‘‘, and’’, 

8 and by adding at the end the following new sub9 paragraph: 

10 ‘‘(C) any dividend excludable from gross 

11 income under section 116(a).’’

12 SEC. 204. TREATMENT OF INSURANCE COMPANIES. 

13 (a) LIFE INSURANCE COMPANIES.—

14 (1) Section 803 is amended by adding at the 

15 end the following new subsection: 

16 ‘‘(c) SPECIAL RULES FOR EXCLUDABLE DIVIDENDS

17 AND RETAINED EARNINGS BASIS ADJUSTMENTS.—

18 ‘‘(1) IN GENERAL.—The exclusion under sec19 tion 116(a) with respect to any dividend received by 

20 a life insurance company shall only apply to such 

21 company’s share (as determined under section 812) 

22 of such dividend. 

23 ‘‘(2) RETAINED EARNINGS BASIS ADJUST24 MENTS.—In the case of any increase in basis under 
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1 section 116(b) allocated under section 282 to stock 

2 held by a life insurance company—

3 ‘‘(A) the life insurance company’s and pol4 icyholders’ shares of such allocation shall be de5 termined in accordance with section 812 in the 

6 same manner as if it were a dividend, and 

7 ‘‘(B) life insurance company gross income 

8 of such company shall be increased by the pol9 icyholders’ share of such allocation. 

10 ‘‘(3) RULES FOR SEGREGATED ASSET AC11 COUNTS.—In the case of stock held in a segregated 

12 asset account (within the meaning of section 817), 

13 this subsection shall be applied as if the policy14 holders’ share of the excludable portion of any divi15 dend, or any increase in basis under section 116(b), 

16 with respect to such stock were 100 percent. 

17 ‘‘(4) COMPUTATION OF EXCLUDABLE DIVIDEND

18 AMOUNT.—In the case of a life insurance company, 

19 the increase under clause (ii) or (iii) of section 

20 281(b)(1)(A) in the company’s excludable dividend 

21 amount shall be limited to the company’s share (as 

22 determined under section 812) of the dividends or 

23 increases in basis described in either such clause.’’
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1 (2) Section 812(d)(1)(A) is amended by insert2 ing ‘‘(including dividends excludable under section 

3 116(a))’’ after ‘‘dividends’’. 

4 (3) Section 815(c)(2)(A)(iii) is amended by 

5 adding ‘‘,the amount of dividends excludable under 

6 section 116(a) (as modified by section 803(c)(1)), 

7 and the amount of basis increase under section 

8 116(b) (as modified by section 803(c)(2))’’ after 

9 ‘‘section 103’’. 

10 (b) OTHER INSURANCE COMPANIES.—

11 (1) Section 832(b)(5)(B) is amended by strik12 ing ‘‘and’’ at the end of clause (ii), by striking the 

13 period at the end of clause (iii) and inserting ‘‘, 

14 and’’, and by adding after clause (iii) the following 

15 new clause: 

16 ‘‘(iv) any dividend excludable under 

17 section 116(a) which is received during 

18 such taxable year and any increase in basis 

19 under section 116(b) which is allocated 

20 under section 282 to such company during 

21 such taxable year.’’

22 (2) Section 832(c) is amended by striking 

23 ‘‘and’’ at the end of paragraph (12), by striking the 

24 period at the end of paragraph (13) and inserting ‘‘; 
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1 and’’, and by adding at the end the following new 

2 paragraph: 

3 ‘‘(14) the amount of dividends received during 

4 the taxable year which are excluded from gross in5 come under section 116(a).’’

6 (3) Section 833(b)(3)(E) is amended—

7 (A) by striking ‘‘and’’ at the end of clause 

8 (i), by striking the period at the end of clause 

9 (ii) and inserting ‘‘, and’’, and by inserting 

10 after clause (ii) the following new clause: 

11 ‘‘(iii) the aggregate amount excluded 

12 for the taxable year under section 

13 116(a).’’, and 

14 (B) by adding at the end the following: 

15 ‘‘The amount determined under clause (iii) 

16 shall be reduced by the amount of any decrease 

17 in such deductions for the taxable year by rea18 son of section 832(b)(5)(B) to the extent such 

19 decrease is attributable to the exclusion under 

20 section 116(a).’’

21 (4) Section 834(c) is amended by adding at the 

22 end the following new paragraph: 

23 ‘‘(10) EXCLUDABLE DIVIDENDS.—The amount 

24 of dividends received during the taxable year which 
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1 are excluded from gross income under section 

2 116(a).’’

3 SEC. 205. TREATMENT OF S CORPORATIONS. 

4 (a) BASIS ADJUSTMENTS RELATING TO DIVI5 DENDS.—Section 1367(a)(1) is amended by striking 

6 ‘‘and’’ at the end of subparagraph (B), by striking the 

7 period at the end of subparagraph (C) and inserting ‘‘, 

8 and’’, and by adding at the end the following new subpara9 graph: 

10 ‘‘(D) increases in basis under section 

11 116(b) allocated to the S corporation.’’. 

12 (b) APPLICATION OF SECTION 116 AND PART X OF

13 SUBCHAPTER B TO S CORPORATIONS.—Section 1368 is 

14 amended by adding at the end the following new sub15 section: 

16 ‘‘(f) COORDINATION WITH DIVIDEND EXCLUSION

17 AND RETAINED EARNINGS BASIS ADJUSTMENTS.—

18 ‘‘(1) DETERMINATION OF EXCLUDED DIVI19 DENDS AMOUNT.—

20 ‘‘(A) IN GENERAL.—Clauses (ii) and (iii) 

21 of section 281(b)(1)(A) shall not apply to 

22 amounts received or allocated in a taxable year 

23 for which the corporation is an S corporation. 
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1 ‘‘(B) CROSS REFERENCE.—

‘‘For treatment of taxes imposed by section 1374, 

see section 281(d)(1).

2 ‘‘(2) DISTRIBUTIONS.—Subject to regulations 

3 prescribed by the Secretary, the preceding provisions 

4 of this section shall not apply to any dividend ex5 cludable from gross income under section 116(a) 

6 and any distribution described in section 283(a).’’

7 (c) MODIFICATION TO TREATMENT OF SECTION

8 1374 TAX.—

9 (1) Paragraph (2) of section 1366(f) is amend10 ed to read as follows: 

11 ‘‘(2) TREATMENT OF TAX IMPOSED ON BUILT12 IN GAINS.—The amount of the items of the net rec13 ognized built-in-gain taken into account under sec14 tion 1374(b)(1) (reduced by any deduction allowed 

15 under section 1374(b)(2)) shall not be taken into ac16 count under this section.’’

17 (2)(A) Subsection (c) of section 1371 is amend18 ed by adding at the end the following new para19 graph: 

20 ‘‘(B) EARNINGS AND PROFITS.—The accu21 mulated earnings and profits of the corporation 

22 shall be increased at the beginning of the tax23 able year by the amount not taken into account 

24 under section 1366 by reason of section
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1 1366(f)(2) (determined without regard any re2 duction of such amount under section 

3 1374(b)(2)) reduced by the tax imposed by sec4 tion 1374 (net of credits allowed).’’

5 (B) Paragraph (1) of section 1371(c) is amend6 ed by striking ‘‘and (3)’’ and inserting ‘‘, (3), and 

7 (4)’’. 

8 (d) REPEAL OF TAX AND TERMINATION WHERE EX9 CESS PASSIVE INVESTMENT INCOME.—

10 (1) REPEAL OF TAX.—

11 (A) IN GENERAL.—Section 1375 is re12 pealed. 

13 (B) CONFORMING AMENDMENTS.—Sec14 tions 26(b)(2)(J) and 1366(f)(3) are repealed. 

15 (2) REPEAL OF TERMINATION.—Section 

16 1362(d) is amended by striking paragraph (3).

17 SEC. 206. REPEAL OF ACCUMULATED EARNINGS TAX AND 

18 PERSONAL HOLDING COMPANY TAX. 

19 (a) IN GENERAL.—Parts I and II of subchapter G 

20 of chapter 1 (relating to corporations improperly accumu21 lating surplus and to personal holding companies) are 

22 hereby repealed. 

23 (b) CONFORMING AMENDMENTS.—

24 (1) Section 12 is amended by striking para25 graph (2) and by redesignating paragraphs (3), (4), 
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1 (5), (6), and (7) as paragraphs (2), (3), (4), (5), 

2 and (6), respectively. 

3 (2) Section 26(b)(2) is amended by striking 

4 subparagraphs (F) and (G). 

5 (3) Section 30A(c) is amended by inserting 

6 ‘‘or’’ at the end of paragraph (1), by striking para7 graphs (2) and (3), and by redesignating paragraph 

8 (4) as paragraph (2). 

9 (4) Section 41(e)(7)(E) is amended by adding 

10 ‘‘and’’ at the end of clause (i), by striking clause 

11 (ii), and by redesignating clause (iii) as clause (ii). 

12 (5) Section 56(b)(2) is amended by striking 

13 subparagraph (C) and by redesignating subpara14 graph (D) as subparagraph (C). 

15 (6) Section 111 is amended by striking sub16 section (d). 

17 (7) Section 170(e)(4)(D) is amended by adding 

18 ‘‘and’’ at the end of clause (i), by striking clause 

19 (ii), and by redesignating clause (iii) as clause (ii). 

20 (8) Sections 170(f)(10)(A), 508(d), 4947, and 

21 4948(c)(4) are each amended by striking 

22 ‘‘545(b)(2),’’ each place it appears. 

23 (9)(A) Section 316(b) is amended by striking 

24 paragraph (2) and by redesignating paragraph (3) 

25 as paragraph (2). 
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1 (B) Section 331(b) is amended by striking 

2 ‘‘(other than a distribution referred to in paragraph 

3 (2)(B) of section 316(b))’’. 

4 (10) Section 341(d) is amended—

5 (A) by striking ‘‘section 544(a) (relating to 

6 personal holding companies)’’ and inserting 

7 ‘‘section 465(f) (relating to constructive owner8 ship rules)’’, and 

9 (B) by inserting before the period at the 

10 end of the next to the last sentence ‘‘and such 

11 paragraph (2) shall be applied by inserting ‘or 

12 by or for his partner’ after ‘his family’ ’’. 

13 (11) Section 381(c) is amended by striking 

14 paragraphs (14) and (17). 

15 (12) Section 443(e) is amended by striking 

16 paragraphs (1) and (2) and by redesignating para17 graphs (3), (4), and (5) as paragraphs (1), (2), and 

18 (3), respectively. 

19 (13) Section 447(g)(4)(A) is amended by strik20 ing ‘‘other than—’’ and all that follows and insert21 ing ‘‘other than an S corporation.’’

22 (14)(A) Section 465(a)(1)(B) is amended to 

23 read as follows: 

24 ‘‘(B) a C corporation which is closely 

25 held,’’. 
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1 (B) Section 465(a)(3) is amended to read as 

2 follows:

3 ‘‘(3) CLOSELY HELD DETERMINATION.—For 

4 purposes of paragraph (1), a corporation is closely 

5 held if, at any time during the last half of the tax6 able year, more than 50 percent in value of its out7 standing stock is owned, directly or indirectly, by or 

8 for not more than 5 individuals. For purposes of this 

9 paragraph, an organization described in section 

10 401(a), 501(c)(17), or 509(a) or a portion of a trust 

11 permanently set aside or to be used exclusively for 

12 the purposes described in section 642(c) shall be 

13 considered an individual.’’

14 (C) Section 465(c)(7)(B) is amended by strik15 ing clause (i) and by redesignating clauses (ii) and 

16 (iii) as clauses (i) and (ii), respectively. 

17 (D) Section 465(c)(7)(G) is amended to read as 

18 follows: 

19 ‘‘(G) LOSS OF 1 MEMBER OF AFFILIATED

20 GROUP MAY NOT OFFSET INCOME OF PERSONAL

21 SERVICE CORPORATION.—Nothing in this para22 graph shall permit any loss of a member of an 

23 affiliated group to be used as an offset against 

24 the income of any other member of such group 

25 which is a personal service corporation (as de-
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1 fined in section 269A(b) but determined by sub2 stituting ‘5 percent’ for ‘10 percent’ in section 

3 269A(b)(2)).’’

4 (E) Section 465 is amended by adding at the 

5 end the following new subsection: 

6 ‘‘(f) CONSTRUCTIVE OWNERSHIP RULES.—For pur7 poses of subsection (a)(3)—

8 ‘‘(1) STOCK NOT OWNED BY INDIVIDUAL.—

9 Stock owned, directly or indirectly, by or for a cor10 poration, partnership, estate, or trust shall be con11 sidered as being owned proportionately by its share12 holders, partners, or beneficiaries. 

13 ‘‘(2) FAMILY OWNERSHIP.—An individual shall 

14 be considered as owning the stock owned, directly or 

15 indirectly, by or for his family. For purposes of this 

16 paragraph, the family of an individual includes only 

17 his brothers and sisters (whether by the whole or 

18 half blood), spouse, ancestors, and lineal descend19 ants. 

20 ‘‘(3) OPTIONS.—If any person has an option to 

21 acquire stock, such stock shall be considered as 

22 owned by such person. For purposes of this para23 graph, an option to acquire such an option, and each 

24 one of a series of such options, shall be considered 

25 as an option to acquire such stock. 
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1 ‘‘(4) APPLICATION OF FAMILY AND OPTION

2 RULES.—Paragraphs (2) and (3) shall be applied if, 

3 but only if, the effect is to make the corporation 

4 closely held under subsection (a)(3). 

5 ‘‘(5) CONSTRUCTIVE OWNERSHIP AS ACTUAL

6 OWNERSHIP.—Stock constructively owned by a per7 son by reason of the application of paragraph (1) or 

8 (3), shall, for purposes of applying paragraph (1) or 

9 (2), be treated as actually owned by such person; 

10 but stock constructively owned by an individual by 

11 reason of the application of paragraph (2) shall not 

12 be treated as owned by him for purposes of again 

13 applying such paragraph in order to make another 

14 the constructive owner of such stock. 

15 ‘‘(6) OPTION RULE IN LIEU OF FAMILY

16 RULE.—If stock may be considered as owned by an 

17 individual under either paragraph (2) or (3) it shall 

18 be considered as owned by him under paragraph (3). 

19 ‘‘(7) CONVERTIBLE SECURITIES.—Outstanding 

20 securities convertible into stock (whether or not con21 vertible during the taxable year) shall be considered 

22 as outstanding stock if the effect of the inclusion of 

23 all such securities is to make the corporation closely 

24 held under subsection (a)(3). The requirement under 

25 the preceding sentence that all convertible securities
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1 must be included if any are to be included shall be 

2 subject to the exception that, where some of the out3 standing securities are convertible only after a later 

4 date than in the case of others, the class having the 

5 earlier conversion date may be included although the 

6 others are not included, but no convertible securities 

7 shall be included unless all outstanding securities 

8 having a prior conversion date are also included.’’

9 (15)(A) Section 553(a)(1) is amended by strik10 ing ‘‘section 543(d)’’ and inserting ‘‘subsection (c)’’. 

11 (B) Section 553 is amended by adding at the 

12 end the following new subsection:

13 ‘‘(c) ACTIVE BUSINESS COMPUTER SOFTWARE ROY14 ALTIES.—

15 ‘‘(1) IN GENERAL.—For purposes of subsection 

16 (a), the term ‘active business computer software roy17 alties’ means any royalties—

18 ‘‘(A) received by any corporation during 

19 the taxable year in connection with the licensing 

20 of computer software, and 

21 ‘‘(B) with respect to which the require22 ments of paragraphs (2), (3), and (4) are met. 

23 ‘‘(2) ROYALTIES MUST BE RECEIVED BY COR24 PORATION ACTIVELY ENGAGED IN COMPUTER SOFT25 WARE BUSINESS.—The requirements of this para-
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1 graph are met if the royalties described in paragraph 

2 (1)—

3 ‘‘(A) are received by a corporation engaged 

4 in the active conduct of the trade or business 

5 of developing, manufacturing, or producing 

6 computer software, and 

7 ‘‘(B) are attributable to computer software 

8 which—

9 ‘‘(i) is developed, manufactured, or 

10 produced by such corporation (or its prede11 cessor) in connection with the trade or 

12 business described in subparagraph (A), or 

13 ‘‘(ii) is directly related to such trade 

14 or business. 

15 ‘‘(3) ROYALTIES MUST CONSTITUTE AT LEAST

16 50 PERCENT OF INCOME.—The requirements of this 

17 paragraph are met if the royalties described in para18 graph (1) constitute at least 50 percent of the ordi19 nary gross income of the corporation for the taxable 

20 year. 

21 ‘‘(4) DEDUCTIONS UNDER SECTIONS 162 AND

22 174 RELATING TO ROYALTIES MUST EQUAL OR EX23 CEED 25 PERCENT OF ORDINARY GROSS INCOME.—

24 ‘‘(A) IN GENERAL.—The requirements of 

25 this paragraph are met if—
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1 ‘‘(i) the sum of the deductions allow2 able to the corporation under sections 162, 

3 174, and 195 for the taxable year which 

4 are properly allocable to the trade or busi5 ness described in paragraph (2) equals or 

6 exceeds 25 percent of the ordinary gross 

7 income of such corporation for such tax8 able year, or 

9 ‘‘(ii) the average of such deductions 

10 for the 5-taxable year period ending with 

11 such taxable year equals or exceeds 25 per12 cent of the average ordinary gross income 

13 of such corporation for such period. 

14 If a corporation has not been in existence dur15 ing the 5-taxable year period described in clause 

16 (ii), then the period of existence of such cor17 poration shall be substituted for such 5-taxable 

18 year period. 

19 ‘‘(B) DEDUCTIONS ALLOWABLE UNDER

20 SECTION 162.—For purposes of subparagraph 

21 (A), a deduction shall not be treated as allow22 able under section 162 if it is specifically allow23 able under another section. 

24 ‘‘(C) LIMITATION ON ALLOWABLE DEDUC25 TIONS.—For purposes of subparagraph (A), no 
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1 deduction shall be taken into account with re2 spect to compensation for personal services ren3 dered by the 5 individual shareholders holding 

4 the largest percentage (by value) of the out5 standing stock of the corporation. For purposes 

6 of the preceding sentence individuals holding 

7 less than 5 percent (by value) of the stock of 

8 such corporation shall not be taken into ac9 count.’’

10 (16) Section 556(b)(1) is amended by striking 

11 ‘‘, but not including’’ and all that follows and insert12 ing a period. 

13 (17) Section 561(a) is amended by striking 

14 paragraph (3), by inserting ‘‘and’’ at the end of 

15 paragraph (1), and by striking ‘‘, and’’ at the end 

16 of paragraph (2) and inserting a period. 

17 (18) Section 562(b) is amended to read as fol18 lows: 

19 ‘‘(b) DISTRIBUTIONS IN LIQUIDATION.—Except in 

20 the case of a foreign personal holding company described 

21 in section 552—

22 ‘‘(1) in the case of amounts distributed in liq23 uidation, the part of such distribution which is prop24 erly chargeable to earnings and profits accumulated 

25 after February 28, 1913, shall be treated as a divi-
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1 dend for purposes of computing the dividends paid 

2 deduction, and 

3 ‘‘(2) in the case of a complete liquidation occur4 ring within 24 months after the adoption of a plan 

5 of liquidation, any distribution within such period 

6 pursuant to such plan shall, to the extent of the 

7 earnings and profits (computed without regard to 

8 capital losses) of the corporation for the taxable year 

9 in which such distribution is made, be treated as a 

10 dividend for purposes of computing the dividends 

11 paid deduction. 

12 For purposes of paragraph (1), a liquidation includes a 

13 redemption of stock to which section 302 applies. Except 

14 to the extent provided in regulations, the preceding sen15 tence shall not apply in the case of any mere holding or 

16 investment company which is not a regulated investment 

17 company.’’

18 (19) Section 563 is amended by striking sub19 sections (a) and (b), by redesignating subsections (c) 

20 and (d) as subsections (a) and (b), and by striking 

21 ‘‘, (b), or (c)’’ in subsection (b) (as so redesignated). 

22 (20) Section 564 is hereby repealed. 

23 (21) Section 631(c) is amended by striking the 

24 next to the last sentence and inserting the following: 

25 ‘‘This subsection shall have no application for pur-
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1 poses of applying subchapter G (relating to corpora2 tions used to avoid income tax on shareholders).’’. 

3 (22) Section 852(b)(1) is amended by striking 

4 ‘‘which is a personal holding company (as defined in 

5 section 542) or’’. 

6 (23)(A) Section 856(h)(1) is amended to read 

7 as follows: 

8 ‘‘(1) IN GENERAL.—For purposes of subsection 

9 (a)(6), a corporation, trust, or association is closely 

10 held if the stock ownership requirement of section 

11 465(a)(3) is met.’’. 

12 (B) Section 856(h)(3)(A)(i) is amended by 

13 striking ‘‘section 542(a)(2)’’ and inserting ‘‘section 

14 465(a)(3)’’.

15 (C) Paragraph (3) of section 856(h) is amended 

16 by striking subparagraph (B) and by redesignating 

17 subparagraphs (C) and (D) as subparagraphs (B) 

18 and (C), respectively. 

19 (D) Subparagraph (C) of section 856(h)(3), as 

20 redesignated by the preceding subparagraph, is 

21 amended by striking ‘‘subparagraph (C)’’ and insert22 ing ‘‘subparagraph (B)’’. 

23 (24) The last sentence of section 882(c)(2) is 

24 amended to read as follows:
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1 ‘‘The preceding sentence shall not be construed to 

2 deny the credit provided by section 33 for tax with3 held at source or the credit provided by section 34 

4 for certain uses of gasoline.’’. 

5 (25) Section 936(a)(3) is amended by striking 

6 subparagraphs (B) and (C), by inserting ‘‘or’’ at the 

7 end of subparagraph (A), and by redesignating sub8 paragraph (D) as subparagraph (B). 

9 (26) Section 936 is amended by striking sub10 section (g). 

11 (27) Section 992(d) is amended by striking 

12 paragraph (2) and by redesignating paragraphs (3), 

13 (4), (5), (6), and (7) as paragraphs (2), (3), (4), 

14 (5), and (6), respectively. 

15 (28) Section 992 is amended by striking sub16 section (e). 

17 (29) Section 1202(e)(8) is amended by striking 

18 ‘‘section 543(d)(1)’’ and inserting ‘‘section 

19 553(c)(1)’’. 

20 (30) Section 1298(b) is amended by striking 

21 paragraph (8) and redesignating paragraph (9) as 

22 paragraph (8). 

23 (31) Section 1504(c)(2)(B) is amended by add24 ing ‘‘and’’ at the end of clause (i), by striking clause 

25 (ii), and by redesignating clause (iii) as clause (ii). 
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1 (32)(A) Section 1551(a) is amended by striking 

2 ‘‘or the accumulated earnings credit’’ and all that 

3 follows and inserting ‘‘unless such transferee cor4 poration shall establish by the clear preponderance 

5 of the evidence that the securing of such benefits 

6 was not a major purpose of such transfer.’’. 

7 (B) The section heading for section 1551 is 

8 amended by striking ‘‘AND ACCUMULATED EARN9 INGS CREDIT’’. 

10 (C) The item relating to section 1551 in the 

11 table of sections for part I of subchapter B of chap12 ter 6 is amended by striking ‘‘and accumulated 

13 earnings credit’’. 

14 (33)(A) Section 1561(a) is amended—

15 (i) by striking paragraph (2), 

16 (ii) by redesignating paragraphs (3) and 

17 (4) as paragraphs (2) and (3), 

18 (iii) by striking ‘‘paragraph (3)’’ each 

19 place it appears and inserting ‘‘paragraph (2)’’, 

20 (iv) by striking ‘‘paragraph (4)’’ and in21 serting ‘‘paragraph (3)’’, and 

22 (v) by striking the third sentence. 

23 (B) Section 1561(b) is amended to read as fol24 lows: 
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1 ‘‘(b) CERTAIN SHORT TAXABLE YEARS.—If a cor2 poration has a short taxable year which does not include 

3 a December 31 and is a component member of a controlled 

4 group of corporations with respect to such taxable year, 

5 then for purposes of this subtitle, the amount in each tax6 able income bracket in the tax table in section 11(b) for 

7 such corporation for such taxable year shall be the amount 

8 specified in subsection (a)(1), divided by the number of 

9 corporations which are component members of such group 

10 on the last day of such taxable year. For purposes of the 

11 preceding sentence, section 1563(b) shall be applied as if 

12 such last day were substituted for December 31.’’. 

13 (34) Section 2057(e)(2)(C) is amended by add14 ing at the end the following new sentence: ‘‘Ref15 erences to sections 542 and 543 in the preceding 

16 sentence shall be treated as references to such sec17 tions as in effect on the day before their repeal.’’

18 (35) Sections 6422 is amended by striking 

19 paragraph (3) and by redesignating paragraphs (4) 

20 through (12) and paragraphs (3) through (11), re21 spectively. 

22 (36) Section 6501 is amended by striking sub23 section (f). 

24 (37) Section 6503(k) of such Code is amended 

25 by striking paragraph (1) and by redesignating 
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1 paragraphs (2) through (5) as paragraphs (1) 

2 through (4), respectively. 

3 (38) Section 6515 is amended by striking para4 graph (1) and by redesignating paragraphs (2) 

5 through (6) as paragraphs (1) through (5), respec6 tively. 

7 (39) Section 6601(b) is amended by striking 

8 paragraph (4) and redesignating paragraph (5) as 

9 paragraph (4). 

10 (40) Subsections (d)(1)(B) and (e)(2) of section 

11 6662 of such Code are each amended by striking ‘‘or 

12 a personal holding company (as defined in section 

13 542)’’. 

14 (41) Section 6683 is hereby repealed. 

15 (42) Section 7518(c)(1) is amended by insert16 ing ‘‘and’’ at the end of subparagraph (C), by strik17 ing ‘‘, and’’ at the end of subparagraph (D) and in18 serting a period, and by striking subparagraph (E). 

19 (c) CLERICAL AMENDMENTS.—

20 (1) The table of parts for subchapter G of 

21 chapter 1 of such Code is amended by striking the 

22 items relating to parts I and II. 

23 (2) The table of sections for part IV of such 

24 subchapter G is amended by striking the item relat25 ing to section 564. 
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1 (3) The table of sections for part I of sub2 chapter B of chapter 68 of such Code is amended 

3 by striking the item relating to section 6683. 

4 SEC. 207. EFFECTIVE DATES. 

5 (a) IN GENERAL.—Except as otherwise provided in 

6 this section, the amendments made by this title shall apply 

7 to distributions received, and basis allocations made under 

8 section 282 of the Internal Revenue Code of 1986 (as 

9 added by this title), after December 31, 2002. 

10 (b) SPECIAL RULES.—

11 (1) SECTION 1374 TAX.—In applying the 

12 amendments made by this title, any tax imposed by 

13 section 1374 of the Internal Revenue Code of 1986 

14 for any taxable year beginning before January 1, 

15 2003, shall not be taken into account. 

16 (2) SECTION 205(d) AND 206.—The amendments 

17 made by sections 205(d) and 206 shall apply to tax18 able years beginning after December 31, 2002; ex19 cept that—

20 (A) section 547 of such Code (as in effect 

21 before its repeal) shall continue to apply to defi22 ciency dividends (as defined in section 547(d) of 

23 such Code) relating to taxable years beginning 

24 before January 1, 2003, and 
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1 (B) subsections (a) and (b) of section 563 

2 of such Code (as so in effect) shall continue to 

3 apply to dividends relating to taxable years be4 ginning before January 1, 2003. 

5 Notwithstanding subparagraphs (A) and (B), such 

6 dividends shall not be taken into account in applying 

7 section 116 of such Code or part X of subchapter 

8 B of chapter 1 of such Code.

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