I

106TH CONGRESS

2D SESSION S. 3087

To amend the Internal Revenue Code of 1986 to simplify the individual

income tax by providing an election for eligible individuals to only be

subject to a 15 percent tax on wage income with a tax return free

filing system, to reduce the burdens of the marriage penalty and alternative minimum tax, and for other purposes.

IN THE SENATE OF THE UNITED STATES

SEPTEMBER 21, 2000

Mr. DORGAN (for himself, Mr. GREGG, and Mr. DURBIN) 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 simplify

the individual income tax by providing an election for

eligible individuals to only be subject to a 15 percent

tax on wage income with a tax return free filing system,

to reduce the burdens of the marriage penalty and alternative minimum tax, and for other purposes.

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

3 SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE

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

5 ‘‘Fair and Simple Shortcut Tax Plan’’.
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1 (b) AMENDMENT OF 1986 CODE.—Except as other2 wise expressly provided, whenever in this Act an amend3 ment or repeal is expressed in terms of an amendment

4 to, or repeal of, a section or other provision, the reference

5 shall be considered to be made to a section or other provi6 sion of the Internal Revenue Code of 1986.

7 TITLE I—FAIR AND SIMPLE

8 SHORTCUT TAX PLAN

9 SEC. 101. FAIR AND SIMPLE SHORTCUT TAX PLAN.

10 (a) IN GENERAL.—Subchapter A of chapter 1 (relat11 ing to determination of tax liability) is amended by adding

12 at the end the following:

13 ‘‘PART VIII—FAIR AND SIMPLE SHORTCUT TAX

14 PLAN

‘‘Sec. 60. Tax on individuals electing FASST.

‘‘Sec. 60A. Computation of applicable taxable income.

‘‘Sec. 60B. Credit against tax.

‘‘Sec. 60C. Election.

‘‘Sec. 60D. Liability for tax.

15 ‘‘SEC. 60. TAX ON INDIVIDUALS ELECTING FASST.

16 ‘‘(a) TAX IMPOSED.—If an individual who is an eligi17 ble taxpayer has an election in effect under this part for

18 a taxable year, there is hereby imposed a tax equal to 15

19 percent of the taxpayer’s applicable taxable income.

20 ‘‘(b) COORDINATION WITH OTHER TAXES.—The tax

21 imposed by this section shall be in lieu of any other tax

22 imposed by this subchapter. The preceding sentence shall
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1 not apply to taxes described in section 26(b)(2) other than

2 subparagraph (A) thereof.

3 ‘‘SEC. 60A. COMPUTATION OF APPLICABLE TAXABLE IN4 COME.

5 ‘‘(a) IN GENERAL.—For purposes of this part, the

6 term ‘applicable taxable income’ means the taxpayer’s ap7 plicable wage income, minus—

8 ‘‘(1) the standard deduction,

9 ‘‘(2) the deductions for personal exemptions

10 provided in section 151, and

11 ‘‘(3) the homeowner expense deduction allow12 able under subsection (c).

13 ‘‘(b) APPLICABLE WAGE INCOME.—For purposes of

14 this part—

15 ‘‘(1) IN GENERAL.—The term ‘applicable wage

16 income’ means, with respect to an individual, wages

17 received by such individual for the taxable year for

18 services performed as an employee of an employer.

19 ‘‘(2) EMPLOYMENT.—The term ‘employment’

20 has the meaning given such term in section 3121(b).

21 ‘‘(3) WAGES.—The term ‘wages’ has the mean22 ing given such term in section 3401(a).

23 ‘‘(c) HOMEOWNER EXPENSE DEDUCTION AL24 LOWED.—
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1 ‘‘(1) IN GENERAL.—For purposes of subsection

2 (a), there shall be allowed as a deduction for the

3 taxable year an amount equal to the product of—

4 ‘‘(A) $5,000, and

5 ‘‘(B) a fraction, the numerator of which is

6 the number of months in such year in which the

7 taxpayer owned and used property as the tax8 payer’s principal residence (within the meaning

9 of section 121) and the denominator of which

10 is 12.

11 ‘‘(2) SPECIAL RULES.—For purposes of this

12 subsection—

13 ‘‘(A) MARRIED INDIVIDUALS.—In the case

14 of a married individual, the ownership and use

15 requirements of paragraph (1) shall be treated

16 as met for any month if either spouse meets

17 them.

18 ‘‘(B) DIVORCE; COOPERATIVE HOUSING.—

19 Rules similar to the rules of paragraphs (3) and

20 (4) of section 121(d) shall apply.

21 ‘‘(C) OUT-OF-RESIDENCE CARE.—If a tax22 payer becomes physically or mentally impaired

23 while owning and using property as a principal

24 residence, then the taxpayer shall be treated as

25 meeting the ownership and use requirements of
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1 paragraph (1) during any period the taxpayer

2 owns the property and resides in any facility

3 (including a nursing home) licensed by a State

4 or political subdivision to care for an individual

5 in the taxpayer’s condition.

6 ‘‘SEC. 60B. CREDITS AGAINST TAX.

7 ‘‘No credit shall be allowed against the tax imposed

8 by this part other than—

9 ‘‘(1) the credit allowable under section 24 (re10 lating to child tax credit),

11 ‘‘(2) the credit allowable under section 32 (re12 lating to earned income credit), and

13 ‘‘(3) the credit for overpayment of tax under

14 section 6402.

15 ‘‘SEC. 60C. ELECTION.

16 ‘‘(a) ELECTION.—An eligible taxpayer may elect to

17 have this part apply for any taxable year.

18 ‘‘(b) ELIGIBLE TAXPAYER.—

19 ‘‘(1) IN GENERAL.—For purposes of this part,

20 the term ‘eligible taxpayer’ means, with respect to

21 any taxable year, a taxpayer who receives—

22 ‘‘(A) applicable wage income in an amount

23 not in excess of—

24 ‘‘(i) $100,000, in the case of a tax25 payer described in section 1(a), and
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1 ‘‘(ii) 50 percent of the amount in ef2 fect under clause (i) for the taxable year,

3 in the case of any other taxpayer, and

4 ‘‘(B) gross income (determined without re5 gard to applicable wage income) in an amount

6 not in excess of—

7 ‘‘(i) $5,000, in the case of a taxpayer

8 described in section 1(a), and

9 ‘‘(ii) 50 percent of the amount in ef10 fect under clause (i) for the taxable year,

11 in the case of any other taxpayer.

12 ‘‘(2) EXCLUSIONS.—The term ‘eligible tax13 payer’ shall not include—

14 ‘‘(A) a married individual unless the indi15 vidual and the spouse both have the same tax16 able year and both make the election,

17 ‘‘(B) a nonresident alien individual, or

18 ‘‘(C) an estate or trust.

19 ‘‘(3) INFLATION ADJUSTMENTS.—In the case of

20 a taxable year beginning after 2001, each dollar

21 amount under paragraph (1) shall be increased by

22 an amount equal to—

23 ‘‘(A) such dollar amount, multiplied by

24 ‘‘(B) the cost-of-living adjustment deter25 mined under section 1(f)(3) for the calendar
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1 year in which the taxable year begins, deter2 mined by substituting ‘calendar year 2000’ for

3 ‘calendar year 1992’ in subparagraph (B)

4 thereof.

5 ‘‘(b) FORM OF ELECTION.—

6 ‘‘(1) IN GENERAL.—An individual shall make

7 an election to have this part apply for any taxable

8 year by furnishing an election certificate to such in9 dividual’s employer not later than the close of the

10 first payroll period after the individual commences

11 work for such employer or January 1 of the taxable

12 year to which such election relates, whichever is

13 later.

14 ‘‘(2) CONTENTS OF CERTIFICATE.—The elec15 tion certificate furnished under paragraph (1)

16 shall—

17 ‘‘(A) contain such information as the Sec18 retary requires to enable the Secretary to carry

19 out this part and enable the employer to with20 hold the appropriate amount of wages under

21 section 3402, and

22 ‘‘(B) contain a certification by the em23 ployee under penalty of perjury that the infor24 mation furnished is correct.
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1 ‘‘(3) AMENDMENT OF CERTIFICATE.—A new

2 election certificate shall be filed within 30 days after

3 the date of any change in the information required

4 under paragraph (2).

5 ‘‘(4) ELECTION CERTIFICATE.—For purposes of

6 this section, the term ‘election certificate’ means the

7 withholding exemption certificate used for purposes

8 of chapter 24.

9 ‘‘(5) ADVANCE PAYMENT OF EARNED INCOME

10 AMOUNT.—The Secretary shall prescribe such regu11 lations as may be necessary to allow an eligible tax12 payer to treat an election certificate furnished under

13 this section as including an earned income eligibility

14 certificate under section 3507 in the case of an eligi15 ble individual claiming the earned income credit

16 under section 32.

17 ‘‘(c) PERIOD ELECTION IN EFFECT.—

18 ‘‘(1) IN GENERAL.—Except as provided in para19 graph (2), an election under this section shall be ef20 fective for the taxable year for which it is made and

21 all subsequent taxable years.

22 ‘‘(2) TERMINATION.—An election under this

23 part shall terminate with respect to an individual for

24 any taxable year and all subsequent taxable years if
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1 at any time during such taxable year such

2 individual—

3 ‘‘(A) is no longer an eligible taxpayer,

4 ‘‘(B) elects to terminate such individual’s

5 election, or

6 ‘‘(C) commits fraud with respect to any in7 formation required to be provided under this

8 section.

9 ‘‘(d) SAFE HARBOR FOR INELIGIBILITY.—In the case

10 of an individual who has a termination under subsection

11 (c)(2)(A), no addition to tax under section 6654 shall

12 apply to any underpayment attributable to eligible wage

13 income of such individual for such taxable year if such

14 underpayment was not due to fraud, negligence, or dis15 regard of rules or regulations (within the meaning of sec16 tion 6662).

17 ‘‘(e) MARITAL STATUS.—For purposes of this part,

18 marital status shall be determined under section 7703.

19 ‘‘SEC. 60D. LIABILITY FOR TAX.

20 ‘‘(a) AMOUNT WITHHELD TREATED AS SATISFAC21 TION OF LIABILITY.—Except as provided in this section,

22 any amount withheld as tax under section 3402(t) for an

23 eligible individual with an election in effect under section

24 60C for the taxable year shall be treated as complete satis-
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1 faction of liability for the tax imposed by section 60(a)

2 for such taxable year.

3 ‘‘(b) EXCEPTIONS.—Notwithstanding subsection

4 (a)—

5 ‘‘(1) OVERPAYMENT.—If the amount withheld

6 as tax under section 3402(t) for an eligible taxpayer

7 with an election in effect under section 60C for the

8 taxable year exceeds the tax imposed under section

9 60(a) for the taxable year, the excess amount shall

10 be treated as an overpayment for purposes of section

11 6402.

12 ‘‘(2) UNDERPAYMENT.—

13 ‘‘(A) IN GENERAL.—If the Secretary deter14 mines that the amount withheld as tax under

15 section 3402(t) for an eligible taxpayer is less

16 than the tax imposed under section 60(a) and

17 such underpayment is not due to fraud, the

18 Secretary may assess and collect such under19 payment in the same manner as if such under20 payment were on account of a mathematical or

21 clerical error appearing on a return of the indi22 vidual for the taxable year.

23 ‘‘(B) DE MINIMIS EXCEPTION.—If the

24 amount by which the tax imposed by section

25 60(a) exceeds the amount withheld as tax under
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1 section 3402(t) by less than the lesser of $100

2 or 10 percent of the tax so imposed, the tax3 payer shall be treated as having no under4 payment.

5 ‘‘(c) REGULATIONS.—The Secretary shall prescribe

6 such regulations as may be necessary to carry out the pro7 visions of this section, including regulations—

8 ‘‘(1) to allow a refund of an overpayment under

9 subsection (b)(1) to a taxpayer without requiring ad10 ditional filing of information by the taxpayer, and

11 ‘‘(2) to notify taxpayers of eligibility for credits

12 allowable under section 60B and allow a claim and

13 refund of any credit not claimed by an eligible tax14 payer during the taxable year.’’.

15 (b) WITHHOLDING FROM WAGES.—Section 3402 (re16 lating to income tax collected at source) is amended by

17 adding at the end the following new subsection:

18 ‘‘(t) WITHHOLDING UNDER THE FAIR AND SIMPLE

19 SHORTCUT TAX PLAN.—

20 ‘‘(1) IN GENERAL.—An employer making pay21 ment of wages to an individual with an election in

22 effect under section 60C shall deduct and withhold

23 upon such wages a tax (in lieu of the tax required

24 to be deducted and withheld under subsection (a))
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1 determined in accordance with tables prescribed by

2 the Secretary in accordance with paragraph (2).

3 ‘‘(2) WITHHOLDING TABLES.—The Secretary

4 shall prescribe 1 or more tables which set forth

5 amounts of wages and income tax to be deducted

6 and withheld based on information furnished to the

7 employer in the employee’s election form and to en8 sure that the aggregate amount withheld from such

9 employee’s wages approximates the tax liability of

10 such individual for the taxable year. Any tables pre11 scribed under this paragraph shall—

12 ‘‘(A) apply with respect to the amount of

13 wages paid during such periods as the Sec14 retary may prescribe, and

15 ‘‘(B) be in such form, and provide for such

16 amounts to be deducted and withheld, as the

17 Secretary determines to be most appropriate to

18 carry out the purposes of this chapter and to

19 reflect the provisions of chapter 1 applicable to

20 such periods, including taking into account any

21 credits allowable under section 24 or 32.

22 The Secretary shall provide that any other provision

23 of this section shall not apply to the extent such pro24 vision is inconsistent with the provisions of this sub25 section.
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1 ‘‘(2) ELECTION CERTIFICATE.—

2 ‘‘(A) IN GENERAL.—In lieu of a with3 holding exemption certificate, an employee shall

4 furnish the employer with a signed election cer5 tificate and any amended election certificate at

6 such time and containing such information as

7 required under section 60C.

8 ‘‘(B) WHEN CERTIFICATE TAKES EF9 FECT.—

10 ‘‘(i) FIRST CERTIFICATE FUR11 NISHED.—An election certificate furnished

12 to an employer in cases in which no pre13 vious such certificate is in effect shall take

14 effect as of the beginning of the first pay15 roll period ending, or the first payment of

16 wages made without regard to a payroll pe17 riod, on or after the date on which such

18 certificate is so furnished.

19 ‘‘(ii) REPLACEMENT CERTIFICATE.—

20 An election certificate furnished to an em21 ployer which replaces an earlier certificate

22 shall take effect as of the beginning of the

23 1st payroll period ending (or the 1st pay24 ment of wages made without regard to a

25 payroll period) on or after the 30th day
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1 after the on which the replacement certifi2 cate is so furnished.’’.

3 (c) WAIVER OF REQUIREMENT TO FILE RETURN OF

4 INCOME.—Subsection (a)(1)(A) of section 6012 (relating

5 to persons required to make return of income) is amended

6 by striking ‘‘or’’ at the end of clause (iii), by striking the

7 period at the end of clause (iv) and inserting ‘‘, or’’, and

8 by inserting after clause (iv) the following new clause:

9 ‘‘(v) who is an eligible taxpayer with

10 an election in effect for the taxable year

11 under section 60C.’’

12 (d) TECHNICAL AND CONFORMING AMENDMENTS.—

13 (1) The table of parts for subchapter A of chap14 ter 1 is amended by adding at the end the following

15 new item:

‘‘Part VIII. Fair and Simple Shortcut Tax Plan.’’

16 (2) Section 6654(a) is amended by inserting

17 ‘‘and section 60C(d)’’ after ‘‘this section’’.

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

19 this section shall apply to taxable years beginning after

20 December 31, 2000.

21 SEC. 102. TAX CREDIT FOR EMPLOYER FASST PLAN START22 UP COSTS.

23 (a) IN GENERAL.—Subpart D of part IV of sub24 chapter A of chapter 1 (relating to business related cred-
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1 its) is amended by adding at the end the following new

2 section:

3 ‘‘SEC. 45D. FASST PLAN EMPLOYER START-UP CREDIT.

4 ‘‘(a) CREDIT ALLOWED.—

5 ‘‘(1) IN GENERAL.—For purposes of section 38,

6 the Fair and Simple Shortcut Tax plan start-up

7 credit determined under this section for the taxable

8 year is an amount equal to the lesser of—

9 ‘‘(A) 50 percent of eligible start-up costs of

10 the taxpayer for the taxable year, or

11 ‘‘(B) $1,000.

12 ‘‘(2) MAXIMUM CREDIT.—The maximum credit

13 allowed with respect to a taxpayer under this sub14 section for all taxable years shall not exceed the

15 amount determined under paragraph (1) for all tax16 able years.

17 ‘‘(b) ELIGIBLE START-UP COSTS.—For purposes of

18 this section, the term ‘eligible start-up costs’ means

19 amounts paid or incurred by an employer (or any prede20 cessor) during the 1 year period beginning on the date

21 on which the employer first employs 1 or more employees

22 with an election in effect under section 60C for the taxable

23 year, in connection with carrying out the withholding re24 quirements of section 3402.
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1 ‘‘(c) CREDIT AVAILABLE FOR EACH WORKSITE.—If

2 a taxpayer maintains a separate worksite for employees,

3 such person shall be treated as a single employer with re4 spect to such worksite for purposes of the credit allowable

5 under subsection (a).’’

6 (b) CONFORMING AMENDMENTS.—

7 (1) Section 38(b) is amended—

8 (A) by striking ‘‘plus’’ at the end of para9 graph (11),

10 (B) by striking the period at the end of

11 paragraph (12), and inserting a comma and

12 ‘‘plus’’, and

13 (C) by adding at the end the following new

14 paragraph:

15 ‘‘(13) the Fair and Simple Shortcut Tax plan

16 start-up credit determined under section 45D.’’

17 (2) The table of sections for subpart D of part

18 IV of subchapter A of chapter 1 is amended by add19 ing at the end the following new item:

‘‘Sec. 45D. Fair and Simple Shortcut Tax plan start-up credit.’’

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

21 this section shall apply to taxable years beginning after

22 December 31, 2000.
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1 TITLE II—PROVISIONS TO

2 SIMPLIFY THE TAX CODE

3 SEC. 201. REDUCTION IN MARRIAGE PENALTY IN STAND4 ARD DEDUCTION.

5 (a) IN GENERAL.—Section 63(c)(2) (relating to basic

6 standard deduction) is amended to read as follows:

7 ‘‘(2) BASIC STANDARD DEDUCTION.—For pur8 poses of paragraph (1), the basic standard deduction

9 is—

10 ‘‘(A) 200 percent of the amount under

11 subparagraph (C) for the taxable year, in the

12 case of a joint return or a surviving spouse (as

13 defined in section 2(a)),

14 ‘‘(B) 150 percent of such amount, in the

15 case of a head of household (as defined in sec16 tion 2(b)), and

17 ‘‘(C) $3,000, in the case of an individual

18 who is not married and who is not a surviving

19 spouse or head of household or a married indi20 vidual filing a separate return.’’

21 (b) EFFECTIVE DATE.—The amendment made by

22 this section shall apply to taxable years beginning after

23 December 31, 2000.
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1 SEC. 202. ALTERNATIVE MINIMUM TAX EXCLUSION OF

2 SELF-EMPLOYMENT INCOME AND CERTAIN

3 ITEMS OF PREFERENCE AND ADJUSTMENTS.

4 (a) INCREASED EXEMPTION FOR SELF-EMPLOY5 MENT INCOME.—Section 55(d)(1) (relating to exemption

6 amount for taxpayers other than corporations) is amended

7 to read as follows:

8 ‘‘(1) EXEMPTION AMOUNT FOR TAXPAYERS

9 OTHER THAN CORPORATIONS.—In the case of a tax10 payer other than a corporation, the term ‘exemption

11 amount’ means the sum of—

12 ‘‘(A) an amount equal to—

13 ‘‘(i) $45,000 in the case of—

14 ‘‘(I) a joint return, or

15 ‘‘(II) a surviving spouse,

16 ‘‘(ii) $33,750 in the case of an indi17 vidual who—

18 ‘‘(I) is not a married individual,

19 or

20 ‘‘(II) is not a surviving spouse,

21 and

22 ‘‘(iii) $22,500 in the case of—

23 ‘‘(I) a married individual who

24 files a separate return, or

25 ‘‘(II) an estate or trust, and

26 ‘‘(B) an amount equal to the lesser of—
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1 ‘‘(i) the self employment income (as

2 defined in section 1402(b)) of the taxpayer

3 for the taxable year, or

4 ‘‘(ii) $1,000,000.

5 For purposes of this paragraph, the term ‘surviving

6 spouse’ has the meaning given to such term by sec7 tion 2(a), and marital status shall be determined

8 under section 7703.’’.

9 (b) EXCLUSION OF CERTAIN ITEMS OF PREFERENCE

10 AND ADJUSTMENTS.—Section 55 (relating to alternative

11 minimum tax imposed) is amended by adding at the end

12 the following new subsection:

13 ‘‘(f) SPECIAL RULE FOR SMALL BUSINESSES.—

14 ‘‘(1) IN GENERAL.—For purposes of this part,

15 in computing the alternative minimum taxable in16 come of a taxpayer to which this subsection applies

17 for any taxable year—

18 ‘‘(A) no adjustments provided in section 56

19 which are attributable to a trade or business of

20 the taxpayer shall be made, and

21 ‘‘(B) taxable income shall not be increased

22 by any item of tax preference described in sec23 tion 57 which is so attributable.

24 ‘‘(2) APPLICATION.—
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1 ‘‘(A) IN GENERAL.—This subsection shall

2 apply to a taxpayer for a taxable year if the

3 taxpayer is not a corporation and the gross re4 ceipts of the taxpayer for the taxable year from

5 all trades or businesses do not exceed

6 $1,000,000.

7 ‘‘(B) SPECIAL RULES.—Rules similar to

8 the rules of paragraphs (2), (3)(B), and (3)(C)

9 of section 448(c) shall apply for purposes of

10 this subsection.’’.

11 (c) CONFORMING AMENDMENTS.—Section 55(d)(3)

12 is amended—

13 (1) by striking ‘‘paragraph (1)(A)’’ and insert14 ing ‘‘paragraph (1)(A)(i)’’ in subparagraph (A),

15 (2) by striking ‘‘paragraph (1)(B)’’ and insert16 ing ‘‘paragraph (1)(A)(ii)’’ in subparagraph (B),

17 (3) by striking ‘‘paragraph (1)(C)’’ and insert18 ing ‘‘paragraph (1)(A)(iii)’’ in subparagraph (C),

19 and

20 (4) by striking ‘‘paragraph (1)(C)(i)’’ and in21 serting ‘‘paragraph (1)(A)(iii)(I)’’ in the second sen22 tence.

23 (d) EFFECTIVE DATE.—The amendments made by

24 this section shall apply to taxable years beginning after

25 December 31, 2000.
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1 SEC. 203. NONREFUNDABLE TAX CREDIT FOR TAX PREPA2 RATION EXPENSES.

3 (a) IN GENERAL.—Subpart A of part IV of sub4 chapter A of chapter 1 (relating to nonrefundable personal

5 credits) is amended by adding at the end the following

6 new section:

7 ‘‘SEC. 25B. TAX PREPARATION EXPENSES.

8 ‘‘(a) ALLOWANCE OF CREDIT.—In the case of an in9 dividual, there shall be allowed as a credit against the tax

10 imposed by this chapter for the taxable year an amount

11 equal to the lesser of—

12 ‘‘(1) 50 percent of the qualified tax preparation

13 expenses of the taxpayer for the taxable year, or

14 ‘‘(2) $100.

15 ‘‘(b) QUALIFIED TAX PREPARATION EXPENSES.—

16 For purposes of this section, the term ‘qualified tax prepa17 ration expenses’ means expenses paid or incurred during

18 the taxable year by an individual in connection with the

19 preparation of the taxpayer’s Federal income tax return

20 for such taxable year, but only if such return is electroni21 cally filed. Such term shall include any expenses related

22 to an income tax return preparer.

23 ‘‘(c) DENIAL OF DEDUCTION.—No deduction shall be

24 allowed under this chapter for any amount taken into ac25 count in determining the credit under this section.’’.
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1 (b) CONFORMING AMENDMENT.—The table of sec2 tions for subpart A of part IV of subchapter A of chapter

3 1 is amended by adding at the end the following new item:

‘‘Sec. 25B. Tax preparation expenses.’’

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

5 this section shall apply to expenses paid or incurred for

6 taxable years beginning after December 31, 2000.

7 SEC. 204. EXEMPTION OF CERTAIN INTEREST AND DIVI8 DEND INCOME FROM TAX.

9 (a) IN GENERAL.—Part III of subchapter B of chap10 ter 1 (relating to amounts specifically excluded from gross

11 income) is amended by inserting after section 115 the fol12 lowing new section:

13 ‘‘SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS AND INTER14 EST RECEIVED BY INDIVIDUALS.

15 ‘‘(a) EXCLUSION FROM GROSS INCOME.—In the case

16 of an individual who does not have an election in effect

17 under section 60C for the taxable year, gross income does

18 not include dividends and interest otherwise includible in

19 gross income which are received during the taxable year

20 by such individual.

21 ‘‘(b) LIMITATIONS.—

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

23 amount excluded under subsection (a) for any tax24 able year shall not exceed $500 ($1,000 in the case

25 of a joint return).
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1 ‘‘(2) CERTAIN DIVIDENDS EXCLUDED.—Sub2 section (a) shall not apply to any dividend from a

3 corporation which for the taxable year of the cor4 poration in which the distribution is made is a cor5 poration exempt from tax under section 521 (relat6 ing to farmers’ cooperative associations).

7 ‘‘(c) SPECIAL RULES.—For purposes of this

8 section—

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

10 GAIN DIVIDENDS FROM REGULATED INVESTMENT

11 COMPANIES AND REAL ESTATE INVESTMENT

12 TRUSTS.—

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

13 ‘‘(2) CERTAIN NONRESIDENT ALIENS INELI14 GIBLE FOR EXCLUSION.—In the case of a non15 resident alien individual, subsection (a) shall apply

16 only in determining the taxes imposed for the tax17 able year pursuant to sections 871(b)(1) and 877(b).

18 ‘‘(3) DIVIDENDS FROM EMPLOYEE STOCK OWN19 ERSHIP PLANS.—Subsection (a) shall not apply to

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

21 (b) CONFORMING AMENDMENTS.—

22 (1) Subparagraph (C) of section 32(c)(5) is

23 amended by striking ‘‘or’’ at the end of clause (i),

24 by striking the period at the end of clause (ii) and
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1 inserting ‘‘; or’’, and by inserting after clause (ii)

2 the following new clause:

3 ‘‘(iii) interest and dividends received

4 during the taxable year which are excluded

5 from gross income under section 116.’’.

6 (2) Subparagraph (A) of section 32(i)(2) is

7 amended by inserting ‘‘(determined without regard

8 to section 116)’’ before the comma.

9 (3) Subparagraph (B) of section 86(b)(2) is

10 amended to read as follows:

11 ‘‘(B) increased by the sum of—

12 ‘‘(i) the amount of interest received or

13 accrued by the taxpayer during the taxable

14 year which is exempt from tax, and

15 ‘‘(ii) the amount of interest and divi16 dends received during the taxable year

17 which are excluded from gross income

18 under section 116.’’.

19 (4) Subsection (d) of section 135 is amended by

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

21 by inserting after paragraph (3) the following new

22 paragraph:

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

24 section shall be applied before section 116.’’.
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1 (5) Paragraph (2) of section 265(a) is amended

2 by inserting before the period ‘‘, or to purchase or

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

4 the extent the interest thereon is excludable from

5 gross income under section 116’’.

6 (6) Subsection (c) of section 584 is amended by

7 adding at the end the following new flush sentence:

8 ‘‘The proportionate share of each participant in the

9 amount of dividends or interest received by the common

10 trust fund and to which section 116 applies shall be con11 sidered for purposes of such section as having been re12 ceived by such participant.’’.

13 (7) Subsection (a) of section 643 is amended by

14 redesignating paragraph (7) as paragraph (8) and

15 by inserting after paragraph (6) the following new

16 paragraph:

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

18 included the amount of any dividends or interest ex19 cluded from gross income pursuant to section 116.’’.

20 (8) Section 854(a) is amended by inserting

21 ‘‘section 116 (relating to partial exclusion of divi22 dends and interest received by individuals) and’’

23 after ‘‘For purposes of’’.

24 (9) Section 857(c) is amended to read as fol25 lows:
26

•S 3087 IS

1 ‘‘(c) RESTRICTIONS APPLICABLE TO DIVIDENDS RE2 CEIVED FROM REAL ESTATE INVESTMENT TRUSTS.—

3 ‘‘(1) TREATMENT FOR SECTION 116.—For pur4 poses of section 116 (relating to partial exclusion of

5 dividends and interest received by individuals), a

6 capital gain dividend (as defined in subsection

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

8 trust which meets the requirements of this part shall

9 not be considered as a dividend.

10 ‘‘(2) TREATMENT FOR SECTION 243.—For pur11 poses of section 243 (relating to deductions for divi12 dends received by corporations), a dividend received

13 from a real estate investment trust which meets the

14 requirements of this part shall not be considered as

15 a dividend.’’.

16 (10) The table of sections for part III of sub17 chapter B of chapter 1 is amended by inserting after

18 the item relating to section 115 the following new

19 item:

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

individuals.’’.

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

21 this section shall apply to taxable years beginning after

22 December 31, 2000.

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