II 

108TH CONGRESS 

1ST SESSION S. 25

To amend the Internal Revenue Code of 1986 to provide that dividend 

income of individuals not be taxed at rates in excess of the maximum 

capital gains rate. 

IN THE SENATE OF THE UNITED STATES 

JANUARY 7, 2003

Mrs. HUTCHISON 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 

that dividend income of individuals not be taxed at rates 

in excess of the maximum capital gains rate.

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

3 SECTION 1. DIVIDENDS OF INDIVIDUALS TAXED AT CAP4 ITAL GAIN RATES. 

5 (a) IN GENERAL.—Section 1(h) of the Internal Rev6 enue Code of 1986 (relating to maximum capital gains 

7 rate) is amended by adding at the end the following new 

8 paragraph: 
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1 ‘‘(13) DIVIDENDS TAXED AS NET CAPITAL

2 GAIN.—

3 ‘‘(A) IN GENERAL.—For purposes of this 

4 subsection, the term ‘net capital gain’ means 

5 net capital gain (determined without regard to 

6 this paragraph), increased by qualified dividend 

7 income. 

8 ‘‘(B) QUALIFIED DIVIDEND INCOME.—For 

9 purposes of this paragraph—

10 ‘‘(i) IN GENERAL.—The term ‘quali11 fied dividend income’ means dividends re12 ceived from domestic corporations during 

13 the taxable year. 

14 ‘‘(ii) CERTAIN DIVIDENDS EX15 CLUDED.—Such term shall not include—

16 ‘‘(I) any dividend from a corpora17 tion which for the taxable year of the 

18 corporation in which the distribution 

19 is made, or the preceding taxable 

20 year, is a corporation exempt from tax 

21 under section 501 or 521, 

22 ‘‘(II) any amount allowed as a 

23 deduction under section 591 (relating 

24 to deduction for dividends paid by 

25 mutual savings banks, etc.), and 
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1 ‘‘(III) any dividend described in 

2 section 404(k). 

3 ‘‘(iii) MINIMUM HOLDING PERIOD.—

4 Such term shall not include any dividend 

5 on any share of stock with respect to which 

6 the holding period requirements of section 

7 246(c) are not met. 

8 ‘‘(C) SPECIAL RULES.—

9 ‘‘(i) AMOUNTS TAKEN INTO ACCOUNT

10 AS INVESTMENT INCOME.—Qualified divi11 dend income shall not include any amount 

12 which the taxpayer takes into account as 

13 investment income under section 

14 163(d)(4)(B). 

15 ‘‘(ii) NONRESIDENT ALIENS.—In the 

16 case of a nonresident alien individual, sub17 paragraph (A) shall apply only—

18 ‘‘(I) in determining the tax im19 posed for the taxable year pursuant to 

20 section 871(b) and only in respect of 

21 amounts which are effectively con22 nected with the conduct of a trade or 

23 business within the United States, 

24 and 
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1 ‘‘(II) in determining the tax im2 posed for the taxable year pursuant to 

3 section 877. 

4 ‘‘(iii) TREATMENT OF DIVIDENDS

5 FROM REGULATED INVESTMENT COMPA6 NIES AND REAL ESTATE INVESTMENT

7 TRUSTS.—

‘‘For treatment of dividends from regulated investment companies and real estate investment 

trusts, see sections 854 and 857.’’

8 (b) EXCLUSION OF DIVIDENDS FROM INVESTMENT

9 INCOME.—Subparagraph (B) of section 163(d)(4) of the 

10 Internal Revenue Code of 1986 (defining net investment 

11 income) is amended by adding at the end the following 

12 flush sentence: 

13 ‘‘Such term shall include qualified dividend in14 come (as defined in section 1(h)(13)(B)) only to 

15 the extent the taxpayer elects to treat such in16 come as investment income for purposes of this 

17 subsection.’’

18 (c) TREATMENT OF DIVIDENDS FROM REGULATED

19 INVESTMENT COMPANIES.—

20 (1) Subsection (a) of section 854 of the Inter21 nal Revenue Code of 1986 (relating to dividends re22 ceived from regulated investment companies) is 

23 amended by inserting ‘‘section 1(h)(13) (relating to 
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1 maximum rate of tax on dividends and interest) 

2 and’’ after ‘‘For purposes of’’. 

3 (2) Paragraph (1) of section 854(b) of such 

4 Code (relating to other dividends) is amended by re5 designating subparagraph (B) as subparagraph (C) 

6 and by inserting after subparagraph (A) the fol7 lowing new subparagraph: 

8 ‘‘(B) MAXIMUM RATE UNDER SECTION

9 1(h).—

10 ‘‘(i) IN GENERAL.—If the aggregate 

11 dividends received by a regulated invest12 ment company during any taxable year is 

13 less than 95 percent of its gross income, 

14 then, in computing the maximum rate 

15 under section 1(h)(13), rules similar to the 

16 rules of subparagraph (A) shall apply. 

17 ‘‘(ii) GROSS INCOME.—For purposes 

18 of clause (i), in the case of 1 or more sales 

19 or other dispositions of stock or securities, 

20 the term ‘gross income’ includes only the 

21 excess of—

22 ‘‘(I) the net short-term capital 

23 gain from such sales or dispositions, 

24 over 
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1 ‘‘(II) the net long-term capital 

2 loss from such sales or dispositions.’’

3 (3) Subparagraph (C) of section 854(b)(1) of 

4 such Code, as redesignated by paragraph (2), is 

5 amended by striking ‘‘subparagraph (A)’’ and insert6 ing ‘‘subparagraph (A) or (B)’’. 

7 (4) Paragraph (2) of section 854(b) of such 

8 Code is amended by inserting ‘‘the maximum rate 

9 under section 1(h)(13) and’’ after ‘‘for purposes of’’. 

10 (d) TREATMENT OF DIVIDENDS RECEIVED FROM

11 REAL ESTATE INVESTMENT TRUSTS.—Section 857(c) of 

12 the Internal Revenue Code of 1986 (relating to restric13 tions applicable to dividends received from real estate in14 vestment trusts) is amended to read as follows: 

15 ‘‘(c) RESTRICTIONS APPLICABLE TO DIVIDENDS RE16 CEIVED FROM REAL ESTATE INVESTMENT TRUSTS.—For 

17 purposes of section 1(h)(13) (relating to maximum rate 

18 of tax on dividends) and section 243 (relating to deduc19 tions received by corporations), a dividend received from 

20 a real estate investment trust which meets the require21 ments of this part shall not be considered a dividend.’’

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

23 this section shall apply to taxable years beginning after 

24 December 31, 2002.

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