II

106TH CONGRESS

1ST SESSION S. 53

To amend the Internal Revenue Code of 1986 to provide a reduction in

the capital gain rates for all taxpayers and a partial dividend income

exclusion for individuals, and for other purposes.

IN THE SENATE OF THE UNITED STATES

JANUARY 19, 1999

Mr. KYL (for himself and Mr. COVERDELL) 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 reduction in the capital gain rates for all taxpayers

and a partial dividend income exclusion for individuals,

and for other purposes.

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

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Capital Gains and Div5 idend Income Reform Act of 1998’’.
2

•S 53 IS

1 SEC. 2. 70-PERCENT CAPITAL GAINS DEDUCTION FOR TAX2 PAYERS OTHER THAN CORPORATIONS.

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

5 ‘‘SEC. 1202. CAPITAL GAINS DEDUCTION.

6 ‘‘(a) GENERAL RULE.—If for any taxable year a tax7 payer other than a corporation has a net capital gain, 70

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

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

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

13 sales or exchanges of capital assets which, under sections

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

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

18 ‘‘(c) COORDINATION WITH TREATMENT OF CAPITAL

19 GAIN UNDER LIMITATION ON INVESTMENT INTEREST.—

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

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

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

24 ‘‘(d) TRANSITIONAL RULE.—
3

•S 53 IS

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

2 year which includes January 1 of the year following

3 the date of enactment of this section—

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

5 net capital gain under subsection (a) shall not

6 exceed the net capital gain determined by only

7 taking into account gains and losses properly

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

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

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

12 such year shall be reduced by the amount taken

13 into account under subparagraph (A) for such

14 year.

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

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

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

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

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

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

•S 53 IS

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

2 ‘‘(iii) an S corporation,

3 ‘‘(iv) a partnership,

4 ‘‘(v) an estate or trust, and

5 ‘‘(vi) a common trust fund.’’.

6 (b) DEDUCTION ALLOWABLE IN COMPUTING AD7 JUSTED GROSS INCOME.—Section 62(a) of the Internal

8 Revenue Code of 1986 (defining adjusted gross income)

9 is amended by inserting after paragraph (17) the following

10 new paragraph:

11 ‘‘(18) LONG-TERM CAPITAL GAINS.—The de12 duction allowed by section 1202.’’.

13 (c) CONFORMING AMENDMENTS.—

14 (1) Section 1 of the Internal Revenue Code of

15 1986 is amended by striking subsection (h).

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

17 by striking ‘‘the amount of gain’’ in the material fol18 lowing subparagraph (B)(ii) and inserting ‘‘30 per19 cent (100 percent in the case of a corporation) of

20 the amount of gain’’.

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

22 amended to read as follows:

23 ‘‘(B) the deduction under section 1202

24 shall not be allowed.’’.
5

•S 53 IS

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

2 such Code is amended by striking all that follows

3 ‘‘long-term capital gain,’’ and inserting ‘‘the maxi4 mum rate on net capital gain under section 1201 or

5 the deduction under section 1202 (whichever is ap6 propriate) shall be taken into account.’’.

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

8 to read as follows:

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

10 amount otherwise allowable as a deduction under

11 this subsection consists of gain from the sale or ex12 change of capital assets held for more than 1 year,

13 proper adjustment shall be made for any deduction

14 allowable to the estate or trust under section 1202

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

16 a trust, the deduction allowed by this subsection

17 shall be subject to section 681 (relating to unrelated

18 business income).’’.

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

20 such Code is amended to read as follows: ‘‘The de21 duction under section 1202 (relating to capital gains

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

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

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

25 by inserting before the period ‘‘, and (ii) the deduc-
6

•S 53 IS

1 tion under section 1202 (relating to capital gains de2 duction) shall not be taken into account’’.

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

4 amended by striking subparagraph (A), by redesig5 nating subparagraph (B) as subparagraph (A), and

6 by inserting after subparagraph (A) (as so redesig7 nated) the following:

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

9 a taxpayer other than a corporation, taxable in10 come from sources outside the United States

11 shall include gain from the sale or exchange of

12 capital assets only to the extent of foreign

13 source capital gain net income.’’.

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

15 redesignated, is amended—

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

17 and inserting the following:

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

19 corporation—’’, and

20 (ii) in clause (i), by striking ‘‘in lieu of ap21 plying subparagraph (A),’’.

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

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

24 the following:
7

•S 53 IS

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

2 rate differential portion of foreign source net

3 capital gain, net capital gain, or the excess of

4 net capital gain from sources within the United

5 States over net capital gain, as the case may

6 be, is the same proportion of such amount as

7 the excess of the highest rate of tax specified in

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

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

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

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

12 amended—

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

14 rate differential (as defined in section

15 904(b)(3)(D)) for the taxable year,’’, and

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

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

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

19 by striking the last sentence.

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

21 amended to read as follows:

22 ‘‘(2) the sum of—

23 ‘‘(A) the excess of the net short-term cap24 ital loss over the net long-term capital gain, and
8

•S 53 IS

1 ‘‘(B) one-half of the excess of the net long2 term capital loss over the net short-term capital

3 gain.’’.

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

5 Code as precedes subparagraph (B) thereof is

6 amended to read as follows:

7 ‘‘(2) SPECIAL RULES.—

8 ‘‘(A) ADJUSTMENTS.—

9 ‘‘(i) For purposes of determining the

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

11 there shall be treated as short-term capital

12 gain in the taxable year an amount equal

13 to the lesser of—

14 ‘‘(I) the amount allowed for the

15 taxable year under paragraph (1) or

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

17 ‘‘(II) the adjusted taxable income

18 for such taxable year.

19 ‘‘(ii) For purposes of determining the

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

21 there shall be treated as short-term capital

22 gain in the taxable year an amount equal

23 to the sum of—

24 ‘‘(I) the amount allowed for the

25 taxable year under paragraph (1) or
9

•S 53 IS

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

2 taxable income for such taxable year,

3 whichever is the least, plus

4 ‘‘(II) the excess of the amount

5 described in subclause (I) over the net

6 short-term capital loss (determined)

7 without regard to this subsection) for

8 such year.’’.

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

10 by adding at the end of the following:

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

12 amount which, under this subsection and section

13 1211(b) (as in effect for taxable year beginning be14 fore January 1, 1999), is treated as a capital loss

15 in the first taxable year beginning after December

16 31, 1998, paragraph (2) and section 1211(b) (as so

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

18 1211(b) as in effect for taxable years beginning

19 after December 31, 1998, shall not apply) to the ex20 tent such amount exceeds the total of any capital

21 gain net income (determined without regard to this

22 subsection) for taxable years beginning after Decem23 ber 31, 1998.’’.

24 (11) Section 1402(i)(1) of such Code is amend25 ed by inserting‘‘, and the deduction provided by sec-
10

•S 53 IS

1 tion 1202 shall not apply’’ before the period at the

2 end thereof.

3 (12) Section 1445(e) of such Code is

4 amended—

5 (A) in paragraph (1), by striking ‘‘35 per6 cent (or, to the extent provided in regulations,

7 20 percent)’’ and inserting ‘‘22 percent (or, to

8 the extent provided in regulation, 15.6 per9 cent)’’, and

10 (B) in paragraph (2), by striking ‘‘35 per11 cent’’ and inserting ‘‘22 percent’’.

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

13 7518(g)(6)(A) of such Code is amended—

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

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

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

17 and inserting ‘‘15.6 percent (22 percent’’.

18 (B) The second sentence of section

19 607(h)(6)(A) of the Merchant Marine Act, 1936 is

20 amended—

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

22 which section 1(h) or 1201(a) of such Code ap23 plies’’, and

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

25 and inserting ‘‘15.6 percent (22 percent’’.
11

•S 53 IS

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

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

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

4 (d) EFFECTIVE DATES.—

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

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

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

12 years beginning on or after January 1 of the year

13 following the date of enactment of this Act.

14 (3) CONTRIBUTIONS.—The amendment made

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

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

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

20 years beginning on or after January 1 of the second

21 year following the date of enactment of this Act.

22 (5) WITHHOLDING.—The amendments made by

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

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

•S 53 IS

1 SEC. 3. REDUCTION OF ALTERNATIVE CAPITAL GAIN TAX

2 FOR CORPORATIONS.

3 (a) IN GENERAL.—Section 1201(a)(2) of the Internal

4 Revenue Code of 1986 (relating to alternative tax for cor5 porations) is amended by striking ‘‘35 percent’’ and in6 serting ‘‘22 percent’’.

7 (b) TRANSITIONAL RULE.—Section 1201(b) of the

8 Internal Revenue Code of 1986 is amended to read as fol9 lows:

10 ‘‘(b) TRANSITIONAL RULE.—

11 ‘‘(1) IN GENERAL.—In applying this section,

12 net capital gain for any taxable year shall not exceed

13 the net capital gain determined by taking into ac14 count only gains and losses properly taken into ac15 count for the portion of the taxable year on or after

16 January 1 of the year following the date of enact17 ment of this subsection.

18 ‘‘(2) SPECIAL RULE FOR PASS-THRU ENTI19 TIES.—Section 1202(d)(2) shall apply for purposes

20 of paragraph (1).’’.

21 (c) CONFORMING AMENDMENT.—Section

22 852(b)(3)(D)(iii) of the Internal Revenue Code of 1986

23 is amended by striking ‘‘65 percent’’ and inserting ‘‘78

24 percent’’.

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

26 this section apply to taxable years ending after December
13

•S 53 IS

1 31 of the year which includes the date of enactment of

2 this Act.

3 SEC. 4. 70-PERCENT EXCLUSION OF DIVIDEND INCOME

4 FROM TAX.

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

7 amounts specifically excluded from gross income) is

8 amended by inserting after section 115 the following new

9 section:

10 ‘‘SEC. 116. 70-PERCENT EXCLUSION OF DIVIDENDS RE11 CEIVED BY INDIVIDUALS.

12 ‘‘(a) EXCLUSION FROM GROSS INCOME.—Gross in13 come does not include 70 percent of the amounts received

14 during the taxable year by an individual as dividends from

15 domestic corporations.

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

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

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

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

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

21 under section 501 (relating to certain charitable, etc., or22 ganization) or section 521 (relating to farmers’ coopera23 tive associations).

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

25 section—
14

•S 53 IS

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

2 GAIN DIVIDENDS FROM REGULATED INVESTMENT

3 COMPANIES AND REAL ESTATE INVESTMENT

4 TRUSTS.—

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

5 ‘‘(2) CERTAIN NONRESIDENT ALIENS INELI6 GIBLE FOR EXCLUSION.—In the case of a non7 resident alien individual, subsection (a) shall apply

8 only—

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

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

11 and only in respect of dividends which are effec12 tively connected with the conduct of a trade or

13 business within the United States, or

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

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

16 ‘‘(3) DIVIDENDS FROM EMPLOYEE STOCK OWN17 ERSHIP PLANS.—Subsection (a) shall not apply to

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

19 (b) CONFORMING AMENDMENTS.—

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

21 of the Internal Revenue Code of 1986 is amended by

22 inserting ‘‘116,’’ before ‘‘137’’.

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

24 is amended by redesignating paragraph (4) as para-
15

•S 53 IS

1 graph (5) and by inserting after paragraph (3) the

2 following new paragraph:

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

4 section shall be applied before section 116.’’

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

6 is amended by adding at the end thereof the follow7 ing new flush sentence:

8 ‘‘The proportionate share of each participant in the

9 amount of dividends received by the common trust fund

10 and to which section 116 applies shall be considered for

11 purposes of such section as having been received by such

12 participant.’’

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

14 is amended by redesignating paragraph (7) as para15 graph (8) and by inserting after paragraph (6) the

16 following new paragraph:

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

18 amount of any dividends excluded from gross income

19 pursuant to section 116.’’

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

21 inserting ‘‘section 116 (relating to partial exclusion

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

23 purposes of’’.

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

25 read as follows:
16

•S 53 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 received by individuals), a capital gain div6 idend (as defined in subsection (b)(3)(C)) received

7 from a real estate investment trust which meets the

8 requirements of this part shall not be considered as

9 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 (6) The table of sections for part III of sub17 chapter B of chapter 1 of such Code is amended by

18 inserting after the item relating to section 115 the

19 following new item:

‘‘Sec. 116. 70-percent exclusion of dividends received by individuals.’’

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

21 this section shall apply to taxable years ending after De22 cember 31 of the year which includes the date of enact23 ment of this Act.

Æ