II

104TH CONGRESS

1ST SESSION S. 701

To amend the Internal Revenue Code of 1986 to limit the interest deduction

allowed corporations and to allow a deduction for dividends paid by

corporations.

IN THE SENATE OF THE UNITED STATES

APRIL 6 (legislative day, APRIL 5), 1995

Mr. SIMON 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 limit the

interest deduction allowed corporations and to allow a

deduction for dividends paid by corporations.

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

3 SECTION 1. LIMITATION ON INTEREST DEDUCTION AL4 LOWED CORPORATIONS.

5 (a) IN GENERAL.—Section 163 of the Internal Reve6 nue Code of 1986 (relating to deduction for interest) is

7 amended by redesignating subsection (k) as subsection (l)

8 and by inserting after subsection (j) the following new sub9 section:
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1 ‘‘(k) LIMITATION ON CORPORATE INTEREST PAY2 MENTS.—

3 ‘‘(1) IN GENERAL.—Except as provided in para4 graph (2), in the case of a corporation, the amount

5 otherwise allowed as a deduction under this chapter

6 for interest paid or accrued during the taxable year

7 by such corporation shall be reduced by 20 percent.

8 ‘‘(2) EXCEPTION FOR CERTAIN CORPORA9 TIONS.—

10 ‘‘(A) IN GENERAL.—Paragraph (1) shall

11 not apply for any taxable year to any corpora12 tion the earnings and profits of which for such

13 taxable year (computed as of the close of the

14 taxable year without diminution by reason of

15 any dividend distributions made during such

16 taxable year) do not exceed the lesser of—

17 ‘‘(i) the corporation’s tax liability

18 under this chapter for such taxable year

19 (determined after the application of para20 graph (1)), or

21 ‘‘(ii) $100,000.

22 ‘‘(B) CONTROLLED GROUP.—For purposes

23 of subparagraph (A), all component members of

24 a controlled group (as defined in section

25 179(d)(7)) shall be treated as 1 corporation.
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1 ‘‘(3) EXCEPTION FOR FARMING BUSINESSES.—

2 Paragraph (1) shall not apply to any corporation

3 substantially all of the assets of which are used in

4 the active conduct of a farming business (as defined

5 in section 448(d)(1)).’’

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

7 subsection (a) shall apply to taxable years beginning after

8 December 31, 1995.

9 SEC. 2. DIVIDEND PAID DEDUCTION.

10 (a) GENERAL RULE.—Part VIII of subchapter B of

11 chapter 1 of the Internal Revenue Code of 1986 (relating

12 to special deductions for corporations) is amended by

13 striking the table of sections and section 241 and inserting

14 the following:

‘‘Subpart A. Dividend paid deduction.

‘‘Subpart B. Dividend received deduction.

‘‘Subpart C. Miscellaneous provisions.

15 ‘‘SEC. 230. ALLOWANCE OF SPECIAL DEDUCTIONS.

16 ‘‘In addition to the deductions provided in part VI

17 (section 161 and following), there shall be allowed as de18 ductions in computing taxable income the items specified

19 in this part.

20 ‘‘Subpart A—Dividend Paid Deduction

‘‘Sec. 231. Dividend paid deduction.

‘‘Sec. 232. Qualified dividend account.

‘‘Sec. 233. Ineligible corporations.

‘‘Sec. 234. Special rules.
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1 ‘‘SEC. 231. DIVIDEND PAID DEDUCTION.

2 ‘‘(a) ALLOWANCE OF DEDUCTION.—In the case of a

3 corporation, there shall be allowed as a deduction an

4 amount equal to 50 percent of the dividends paid by such

5 corporation during the taxable year.

6 ‘‘(b) LIMITATION BASED ON AMOUNT IN QUALIFIED

7 DIVIDEND ACCOUNT.—The amount of the dividends paid

8 during any taxable year which may be taken into account

9 under subsection (a) shall not exceed the amount in the

10 corporation’s qualified dividend account as of the close of

11 such taxable year determined after the application of sec12 tion 232(b)(1) for the taxable year but before the applica13 tion of section 232(b)(2) for such taxable year.

14 ‘‘SEC. 232. QUALIFIED DIVIDEND ACCOUNT.

15 ‘‘(a) ESTABLISHMENT OF ACCOUNT.—Each corpora16 tion shall establish a qualified dividend account. The open17 ing balance of such account shall be zero.

18 ‘‘(b) ADJUSTMENTS TO ACCOUNTS.—As of the close

19 of each taxable year beginning after January 1, 1995, the

20 qualified dividend account—

21 ‘‘(1) shall be increased by the adjusted taxable

22 income of the corporation for the taxable year, and

23 ‘‘(2) shall be reduced by the amount of the divi24 dends paid by the corporation during the taxable

25 year to the extent the amount so paid does not ex26 ceed the limitation of section 231(b).
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1 ‘‘(c) ADJUSTED TAXABLE INCOME.—For purposes of

2 this section—

3 ‘‘(1) IN GENERAL.—The term ‘adjusted taxable

4 income’ means taxable income adjusted as provided

5 in this subsection.

6 ‘‘(2) ADJUSTMENT FOR CERTAIN QUALIFYING

7 DIVIDENDS.—Taxable income shall be increased by

8 the deduction allowed under section 243 with respect

9 to that portion of any qualifying dividend (as defined

10 in section 243(b)(1)) for which such deduction is de11 termined at a rate of less than 100 percent. Similar

12 rules shall apply in the case of dividends for which

13 deductions are allowable under section 245(b).

14 ‘‘(3) ADJUSTMENT FOR TAX CREDITS.—

15 ‘‘(A) IN GENERAL.—Taxable income shall

16 be reduced by the deduction equivalent of the

17 tentative nonrefundable credits for the taxable

18 year.

19 ‘‘(B) DEDUCTION EQUIVALENT.—For pur20 poses of subparagraph (A), the deduction equiv21 alent of the tentative nonrefundable credits for

22 any taxable year is the amount which (if al23 lowed as a deduction for the taxable year)

24 would reduce the tax liability (as defined in sec-
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1 tion 26(b)) for the taxable year by an amount

2 equal to the tentative nonrefundable credits.

3 ‘‘(C) TENTATIVE NONREFUNDABLE CRED4 ITS.—For purposes of this paragraph, the term

5 ‘tentative nonrefundable credits’ means the

6 amount of the credits which would have been

7 allowable under part IV of subchapter A of this

8 chapter for the taxable year (other than the

9 credit allowable under section 34) if no deduc10 tion were allowable under section 231.

11 ‘‘(4) ADJUSTMENT FOR CORPORATE MINIMUM

12 TAX.—If tax is imposed by section 55 on the cor13 poration for any taxable year, taxable income for the

14 succeeding taxable year shall be increased by an

amount equal to 35 15 ⁄100 of the amount of tax so im16 posed.

17 ‘‘(5) DIVIDEND PAID DEDUCTION NOT TAKEN

18 INTO ACCOUNT.—Taxable income shall be deter19 mined without regard to the deduction allowed under

20 section 231.

21 ‘‘SEC. 233. INELIGIBLE CORPORATIONS.

22 ‘‘(a) GENERAL RULE.—No deduction shall be allowed

23 under section 231 with respect to any dividend paid by—

24 ‘‘(1) a regulated investment company,

25 ‘‘(2) a real estate investment trust,
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1 ‘‘(3) an S corporation,

2 ‘‘(4) any organization taxable under subchapter

3 T of this chapter (relating to cooperative organiza4 tions), or

5 ‘‘(5) a FSC or DISC.

6 ‘‘(b) FOREIGN CORPORATIONS.—In the case of a for7 eign corporation—

8 ‘‘(1) no deduction shall be allowed under section

9 231 for dividends paid by such corporation during

10 any taxable year unless the corporation meets the

11 requirements of section 245(a) for such taxable year,

12 ‘‘(2) only adjusted taxable income effectively

13 connected with the conduct of a trade or business in

14 the United States and attributable to the uninter15 rupted period referred to in section 245(a) shall be

16 added to the qualified dividend account, and

17 ‘‘(3) any distribution shall be treated as made

18 ratably out of income effectively connected with the

19 conduct of a trade or business in the United States

20 and other income.

21 ‘‘SEC. 234. SPECIAL RULES.

22 ‘‘(a) CERTAIN DISTRIBUTIONS NOT TREATED AS

23 DIVIDENDS.—For purposes of this subpart, the term ‘divi24 dend’ does not include—
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1 ‘‘(1) any distribution in redemption of stock, in

2 liquidation, or in a reorganization (whether or not

3 such distribution is treated as a distribution to

4 which section 301 applies), and

5 ‘‘(2) any dividend described in section 244 (re6 lating to dividends received on certain preferred

7 stock).

8 ‘‘(b) DEDUCTION NOT TAKEN INTO ACCOUNT FOR

9 PURPOSES OF CERTAIN LIMITATIONS BASED ON TAX10 ABLE INCOME.—For purposes of sections 246(c), 613,

11 613A, and 593, taxable income shall be determined with12 out regard to the deduction allowed under section 231.

13 ‘‘(c) TREATMENT OF DIVIDENDS RECEIVED BY 5-

14 PERCENT TAX-EXEMPT SHAREHOLDERS.—

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

16 subchapter F (relating to taxation of unrelated busi17 ness income of certain exempt organizations), any

18 dividend received by a tax-exempt organization from

19 a corporation in which such organization is a 5-per20 cent shareholder shall be treated as unrelated busi21 ness taxable income to the extent of the amount of

22 the deduction allowable under section 231 to such

23 corporation with respect to such dividend. Except as

24 provided in regulations, the amount of such deduc-
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1 tion shall be determined on the basis of the return

2 filed by the corporation for the taxable year.

3 ‘‘(2) DEFINITIONS.—For purposes of this sub4 section—

5 ‘‘(A) 5-PERCENT SHAREHOLDER.—The

6 term ‘5-percent shareholder’ means any tax-ex7 empt organization which owns (or is considered

8 as owning within the meaning of section 318)—

9 ‘‘(i) 5 percent or more (by value) of

10 the outstanding stock of the corporation,

11 or

12 ‘‘(ii) stock possessing 5 percent or

13 more of the total combined voting power of

14 all stock of the corporation.

15 ‘‘(B) TAX-EXEMPT ORGANIZATION.—The

16 term ‘tax-exempt organization’ means any orga17 nization which is exempt from the tax imposed

18 by this chapter.

19 ‘‘(C) RELATED ENTITIES.—A tax-exempt

20 organization and 1 or more other tax-exempt

21 organizations which have—

22 ‘‘(i) significant common purposes and

23 substantial common membership, or

24 ‘‘(ii) directly or indirectly substantial

25 common direction or control,
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1 shall be treated as 1 tax-exempt organization

2 for purposes of this paragraph.

3 ‘‘(d) TREATMENT OF SUBSEQUENT ADJUST4 MENTS.—If there is any adjustment which affects the

5 amount of the adjusted taxable income of a corporation

6 for any taxable year (whether by reason of any carryback

7 to such taxable year or otherwise) for purposes of this sub8 part and subpart B, the amount of such adjustment shall

9 be treated as made on the close of such taxable year.

10 ‘‘(e) ALLOCATION OF QUALIFIED DIVIDEND AC11 COUNT IN CORPORATE SEPARATIONS, REORGANIZATIONS,

12 AND REDEMPTIONS.—Adjustments similar to the adjust13 ments provided in subsection (h) or (n)(7) of section 312

14 shall be made to the qualified dividend account in the case

15 of a transaction described in either of such subsections.

16 ‘‘(f) MUTUAL LIFE INSURANCE COMPANIES.—

17 ‘‘(1) GENERAL RULE.—In the case of a mutual

18 life insurance company, for purposes of this subpart,

19 80 percent of the differential earnings amount (as

20 defined in section 809(a)(3)) shall be treated as a

21 dividend paid to a shareholder.

22 ‘‘(2) REGULATIONS.—The Secretary may pre23 scribe regulations applying rules consistent with this

24 subpart to mutual life insurance companies. Such

25 regulations may include rules treating an appro-
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1 priate portion of the recomputed differential earn2 ings amount (as defined in section 809(f)(3)) as an

3 adjustment to the amount described in paragraph

4 (1).

5 ‘‘Subpart B—Dividend Received Deduction

‘‘Sec. 243. Dividends received by corporations.

‘‘Sec. 244. Dividends received on certain preferred stock.

‘‘Sec. 245. Dividends received from certain foreign corporations.

‘‘Sec. 246. Rules applying to deductions for dividends received.

‘‘Sec. 246A. Dividends received deduction reduced where portfolio stock is debt financed.

‘‘Sec. 247. Dividends paid on certain preferred stock of public

utilities.’’.

6 (b) COMPENSATORY WITHHOLDING TAX ON DIVI7 DENDS PAID TO NONRESIDENT ALIENS OR FOREIGN

8 CORPORATIONS.—

9 (1) GENERAL RULE.—Subpart D of part II of

10 subchapter N of chapter 1 (relating to miscellaneous

11 provisions) is amended by adding at the end the fol12 lowing new section:

13 ‘‘SEC. 899. ADDITIONAL TAX ON DIVIDENDS TO REFLECT

14 DIVIDEND PAID DEDUCTION.

15 ‘‘(a) GENERAL RULE.—In addition to any tax im16 posed by section 871 or 881, there is hereby imposed a

17 tax equal to 30.4 percent of the dividends received from

18 sources within the United States by a nonresident alien

19 individual or foreign corporation.

20 ‘‘(b) TAX NOT TO APPLY TO SHAREHOLDER’S EF21 FECTIVELY CONNECTED ITEMS.—The tax imposed by this
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1 section shall not apply to any dividend to the extent such

2 dividend is effectively connected with the conduct of a

3 trade or business by the shareholder within the United

4 States.

5 ‘‘(c) CORRESPONDING INCREASE IN WITHHOLDING

6 TAX.—In the case of any dividend subject to tax under

7 subsection (a), the tax imposed by section 1441 or 1442

8 (as the case may be) shall be increased by an amount

9 equal to the applicable percentage of such dividend.

10 ‘‘(d) EXCEPTION FOR CERTAIN TREATY COUN11 TRIES.—The tax imposed by subsection (a) shall not apply

12 to any dividend paid to a resident or corporation of a for13 eign country during any period—

14 ‘‘(1) in which an income tax treaty between

15 such country and the United States is in effect, and

16 ‘‘(2) during which there is in effect a certifi17 cation by the Secretary that—

18 ‘‘(A) such income tax treaty has adequate

19 provisions to prevent treaty shopping, and

20 ‘‘(B) if such foreign country imposes an in21 come tax comparable to the tax imposed by this

22 subtitle and grants relief from such tax to its

23 residents, such country grants relief equivalent

24 to that provided in section 231 with respect to

25 dividends paid to United States persons.
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1 The requirements of paragraph (2) shall not apply to divi2 dends paid before January 1, 1996.’’.

3 (2) CLERICAL AMENDMENT.—The table of sec4 tions for subpart D of part II of subchapter N of

5 chapter 1 is amended by adding at the end thereof

6 the following new item:

‘‘Sec. 899. Additional tax on dividends to reflect dividend paid deduction.’’.

7 (c) SECTION 381 TO APPLY TO QUALIFIED DIVI8 DEND ACCOUNT.—Subsection (c) of section 381 (relating

9 to items of the distributor or transferor corporation) is

10 amended by adding at the end thereof the following new

11 paragraph:

12 ‘‘(27) QUALIFIED DIVIDEND ACCOUNT.—Under

13 regulations prescribed by the Secretary, the acquir14 ing corporation shall take into account (to the extent

15 proper to carry out the purposes of this section and

16 subpart A of part VIII of subchapter B of this chap17 ter) the qualified dividend account of the distributor

18 or transferor corporation.’’.

19 (d) CLERICAL AMENDMENT.—Part VIII of sub20 chapter B of chapter 1 is amended by inserting after sec21 tion 247 the following:

22 ‘‘Subpart C—Miscellaneous Provisions

‘‘Sec. 248. Organizational expenditures.

‘‘Sec. 249. Limitation on deduction of bond premium on repurchase.’’
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