II

106TH CONGRESS

1ST SESSION S. 283

To amend the Internal Revenue Code of 1986 to provide a partial exclusion

from gross income for dividends and interest received by individuals.

IN THE SENATE OF THE UNITED STATES

JANUARY 21, 1999

Mr. MCCAIN introduced the following bill; which was read twice and referred

to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to provide

a partial exclusion from gross income for 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. SHORT TITLE.

4 This Act may be cited as the ‘‘Middle-Income Savings

5 and Investment Act of 1999’’.

6 SEC. 2. EXEMPTION OF CERTAIN INTEREST AND DIVIDEND

7 INCOME FROM TAX.

8 (a) IN GENERAL.—Part III of subchapter B of chap9 ter 1 of the Internal Revenue Code of 1986 (relating to

10 amounts specifically excluded from gross income) is
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1 amended by inserting after section 115 the following new

2 section:

3 ‘‘SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS AND INTER4 EST RECEIVED BY INDIVIDUALS.

5 ‘‘(a) EXCLUSION FROM GROSS INCOME.—Gross in6 come does not include the sum of the amounts received

7 during the taxable year by an individual as—

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

9 ‘‘(2) interest.

10 ‘‘(b) LIMITATIONS.—

11 ‘‘(1) MAXIMUM AMOUNT.—The aggregate

12 amount excluded under subsection (a) for any tax13 able year shall not exceed $200 ($400 in the case of

14 a joint return).

15 ‘‘(2) CERTAIN DIVIDENDS EXCLUDED.—Sub16 section (a)(1) shall not apply to any dividend from

17 a corporation which, for the taxable year of the cor18 poration in which the distribution is made, or for the

19 next preceding taxable year of the corporation, is a

20 corporation exempt from tax under section 501 (re21 lating to certain charitable, etc., organization) or

22 section 521 (relating to farmers’ cooperative associa23 tions).

24 ‘‘(c) INTEREST.—For purposes of this section, the

25 term ‘interest’ means—
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1 ‘‘(1) interest on deposits with a bank (as de2 fined in section 581),

3 ‘‘(2) amounts (whether or not designated as in4 terest) paid in respect of deposits, investment certifi5 cates, or withdrawable or repurchasable shares, by—

6 ‘‘(A) a mutual savings bank, cooperative

7 bank, domestic building and loan association,

8 industrial loan association or bank, or credit

9 union, or

10 ‘‘(B) any other savings or thrift institution

11 which is chartered and supervised under Fed12 eral or State law,

13 the deposits or accounts in which are insured under

14 Federal or State law or which are protected and

15 guaranteed under State law,

16 ‘‘(3) interest on—

17 ‘‘(A) evidences of indebtedness (including

18 bonds, debentures, notes, and certificates)

19 issued by a domestic corporation in registered

20 form, and

21 ‘‘(B) to the extent provided in regulations

22 prescribed by the Secretary, other evidences of

23 indebtedness issued by a domestic corporation

24 of a type offered by corporations to the public,
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1 ‘‘(4) interest on obligations of the United

2 States, a State, or a political subdivision of a State

3 (not excluded from gross income of the taxpayer

4 under any other provision of law), and

5 ‘‘(5) interest attributable to participation shares

6 in a trust established and maintained by a corpora7 tion established pursuant to Federal law.

8 ‘‘(d) SPECIAL RULES.—For purposes of this

9 section—

10 ‘‘(1) DISTRIBUTIONS FROM REGULATED IN11 VESTMENT COMPANIES AND REAL ESTATE INVEST12 MENT TRUSTS.—Subsection (a) shall apply with re13 spect to distributions by—

14 ‘‘(A) regulated investment companies to

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

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

17 extent provided in section 857(c).

18 ‘‘(2) DISTRIBUTIONS BY A TRUST.—For pur19 poses of subsection (a), the amount of dividends and

20 interest properly allocable to a beneficiary under sec21 tion 652 or 662 shall be deemed to have been re22 ceived by the beneficiary ratably on the same date

23 that the dividends and interest were received by the

24 estate or trust.
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1 ‘‘(3) CERTAIN NONRESIDENT ALIENS INELI2 GIBLE FOR EXCLUSION.—In the case of a non3 resident alien individual, subsection (a) shall apply

4 only—

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

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

7 and only in respect of dividends and interest

8 which are effectively connected with the conduct

9 of a trade or business within the United States,

10 or

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

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

13 (b) CONFORMING AMENDMENTS.—

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

16 inserting after the item relating to section 115 the

17 following new item:

‘‘Sec. 116. Partial exclusion of dividends and interest received by

individuals.’’.

18 (2) Paragraph (2) of section 265(a) of such

19 Code is amended by inserting before the period at

20 the end the following: ‘‘, or to purchase or carry ob21 ligations or shares, or to make deposits, to the ex22 tent the interest thereon is excludable from gross in23 come under section 116’’.
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1 (3) Subsection (c) of section 584 of such Code

2 is amended by adding at the end the following new

3 flush sentence:

4 ‘‘The proportionate share of each participant in the

5 amount of dividends or interest received by the common

6 trust fund and to which section 116 applies shall be con7 sidered for purposes of such section as having been re8 ceived by such participant.’’.

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

10 is amended by redesignating paragraph (7) as para11 graph (8) and by inserting after paragraph (6) the

12 following new paragraph:

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

14 included the amount of any dividends or interest ex15 cluded from gross income pursuant to section 116.’’.

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

17 adding at the end the following new subsection:

18 ‘‘(c) TREATMENT UNDER SECTION 116.—

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

20 116, in the case of any dividend (other than a divi21 dend described in subsection (a)) received from a

22 regulated investment company which meets the re23 quirements of section 852 for the taxable year in

24 which it paid the dividend—
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1 ‘‘(A) the entire amount of such dividend

2 shall be treated as a dividend if the sum of the

3 aggregate dividends and the aggregate interest

4 received by such company during the taxable

5 year equals or exceeds 75 percent of its gross

6 income, or

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

8 there shall be taken into account under section

9 116 only the portion of such dividend which

10 bears the same ratio to the amount of such div11 idend as the sum of the aggregate dividends re12 ceived and aggregate interest received bears to

13 gross income.

14 For purposes of the preceding sentence, gross in15 come and aggregate interest received shall each be

16 reduced by so much of the deduction allowable by

17 section 163 for the taxable year as does not exceed

18 aggregate interest received for the taxable year.

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

20 of any distribution by a regulated investment com21 pany which may be taken into account as a dividend

22 for purposes of the exclusion under section 116 shall

23 not exceed the amount so designated by the com24 pany in a written notice to its shareholders mailed
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1 not later than 60 days after the close of its taxable

2 year.

3 ‘‘(3) DEFINITIONS.—For purposes of this

4 subsection—

5 ‘‘(A) The term ‘gross income’ does not in6 clude gain from the sale or other disposition of

7 stock or securities.

8 ‘‘(B) The term ‘aggregate dividends’ in9 cludes only dividends received from domestic

10 corporations other than dividends described in

11 section 116(b)(2). In determining the amount

12 of any dividend for purposes of this subpara13 graph, the rules provided in section 116(d)(1)

14 (relating to certain distributions) shall apply.

15 ‘‘(C) The term ‘interest’ has the meaning

16 given such term by section 116(c).’’.

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

18 is amended to read as follows:

19 ‘‘(c) LIMITATIONS APPLICABLE TO DIVIDENDS RE20 CEIVED FROM REAL ESTATE INVESTMENT TRUSTS.—

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

22 116 (relating to an exclusion for dividends and inter23 est received by individuals) and section 243 (relating

24 to deductions for dividends received by corpora25 tions), a dividend received from a real estate invest-
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1 ment trust which meets the requirements of this

2 part shall not be considered as a dividend.

3 ‘‘(2) TREATMENT AS INTEREST.—For purposes

4 of section 116, in the case of a dividend (other than

5 a capital gain dividend, as defined in subsection

6 (b)(3)(C)) received from a real estate investment

7 trust which meets the requirements of this part for

8 the taxable year in which it paid the dividend—

9 ‘‘(A) such dividend shall be treated as in10 terest if the aggregate interest received by the

11 real estate investment trust for the taxable year

12 equals or exceeds 75 percent of its gross in13 come, or

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

15 the portion of such dividend which bears the

16 same ratio to the amount of such dividend as

17 the aggregate interest received bears to gross

18 income shall be treated as interest.

19 ‘‘(3) ADJUSTMENTS TO GROSS INCOME AND AG20 GREGATE INTEREST RECEIVED.—For purposes of

21 paragraph (2)—

22 ‘‘(A) gross income does not include the net

23 capital gain,

24 ‘‘(B) gross income and aggregate interest

25 received shall each be reduced by so much of
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1 the deduction allowable by section 163 for the

2 taxable year (other than for interest on mort3 gages on real property owned by the real estate

4 investment trust) as does not exceed aggregate

5 interest received by the taxable year, and

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

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

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

9 ‘‘(4) INTEREST.—The term ‘interest’ has the

10 meaning given such term by section 116(c).

11 ‘‘(5) NOTICE TO SHAREHOLDERS.—The amount

12 of any distribution by a real estate investment trust

13 which may be taken into account as interest for pur14 poses of the exclusion under section 116 shall not

15 exceed the amount so designated by the trust in a

16 written notice to its shareholders mailed not later

17 than 60 days after the close of its taxable year.’’.

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

19 this section shall apply to taxable years beginning after

20 December 31, 1998.

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