II 

108TH CONGRESS 

1ST SESSION S. 26

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

and interest 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 and interest 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 AND INTEREST OF INDIVIDUALS 

4 TAXED AT CAPITAL 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 AND INTEREST TAXED AS

2 NET CAPITAL 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 and qualified interest 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) QUALIFIED INTEREST INCOME.—For 

9 purposes of this paragraph, the term ‘qualified 

10 interest income’ means—

11 ‘‘(i) interest on deposits with a bank 

12 (as defined in section 581), 

13 ‘‘(ii) amounts (whether or not des14 ignated as interest) paid, in respect of de15 posits, investment certificates, or 

16 withdrawable or repurchasable shares, 

17 by—

18 ‘‘(I) a mutual savings bank, co19 operative bank, domestic building and 

20 loan association, industrial loan asso21 ciation or bank, or credit union, or 

22 ‘‘(II) any other savings or thrift 

23 institution which is chartered and su24 pervised under Federal or State law, 
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1 the deposits or accounts in which are in2 sured under Federal or State law or which 

3 are protected and guaranteed under State 

4 law, 

5 ‘‘(iii) interest on—

6 ‘‘(I) evidences of indebtedness 

7 (including bonds, debentures, notes, 

8 and certificates) issued by a domestic 

9 corporation in registered form, and 

10 ‘‘(II) to the extent provided in 

11 regulations prescribed by the Sec12 retary, other evidences of indebtedness 

13 issued by a domestic corporation of a 

14 type offered by corporations to the 

15 public, 

16 ‘‘(iv) interest on obligations of the 

17 United States, a State, or a political sub18 division of a State (not excluded from 

19 gross income of the taxpayer under any 

20 other provision of law), and 

21 ‘‘(v) interest attributable to participa22 tion shares in a trust established and 

23 maintained by a corporation established 

24 pursuant to Federal law. 

25 ‘‘(D) SPECIAL RULES.—
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1 ‘‘(i) AMOUNTS TAKEN INTO ACCOUNT

2 AS INVESTMENT INCOME.—Qualified divi3 dend income and qualified interest income 

4 shall not include any amount which the 

5 taxpayer takes into account as investment 

6 income under section 163(d)(4)(B). 

7 ‘‘(ii) NONRESIDENT ALIENS.—In the 

8 case of a nonresident alien individual, sub9 paragraph (A) shall apply only—

10 ‘‘(I) in determining the tax im11 posed for the taxable year pursuant to 

12 section 871(b) and only in respect of 

13 amounts which are effectively con14 nected with the conduct of a trade or 

15 business within the United States, 

16 and 

17 ‘‘(II) in determining the tax im18 posed for the taxable year pursuant to 

19 section 877. 

20 ‘‘(iii) TREATMENT OF DIVIDENDS

21 FROM REGULATED INVESTMENT COMPA-
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1 NIES AND REAL ESTATE INVESTMENT

2 TRUSTS.—

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

trusts, see sections 854 and 857.’’

3 (b) EXCLUSION OF DIVIDENDS AND INTEREST FROM

4 INVESTMENT INCOME.—Subparagraph (B) of section 

5 163(d)(4) of the Internal Revenue Code of 1986 (defining 

6 net investment income) is amended by adding at the end 

7 the following flush sentence: 

8 ‘‘Such term shall include qualified dividend in9 come (as defined in section 1(h)(13)(B)) or 

10 qualified interest income (as defined in section 

11 1(h)(13)(C)) only to the extent the taxpayer 

12 elects to treat such income as investment in13 come for purposes of this subsection.’’

14 (c) TREATMENT OF DIVIDENDS FROM REGULATED

15 INVESTMENT COMPANIES.—

16 (1) Subsection (a) of section 854 of the Inter17 nal Revenue Code of 1986 (relating to dividends re18 ceived from regulated investment companies) is 

19 amended by inserting ‘‘section 1(h)(13) (relating to 

20 maximum rate of tax on dividends and interest) 

21 and’’ after ‘‘For purposes of’’. 

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

23 Code (relating to other dividends) is amended by re24 designating subparagraph (B) as subparagraph (C) 
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1 and by inserting after subparagraph (A) the fol2 lowing new subparagraph: 

3 ‘‘(B) MAXIMUM RATE UNDER SECTION

4 1(h).—

5 ‘‘(i) IN GENERAL.—If the sum of the 

6 aggregate dividends received, and the ag7 gregate interest described in section 

8 1(h)(13)(C) received, by a regulated invest9 ment company during any taxable year is 

10 less than 95 percent of its gross income, 

11 then, in computing the maximum rate 

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

13 rules of subparagraph (A) shall apply. 

14 ‘‘(ii) GROSS INCOME.—For purposes 

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

16 or other dispositions of stock or securities, 

17 the term ‘gross income’ includes only the 

18 excess of—

19 ‘‘(I) the net short-term capital 

20 gain from such sales or dispositions, 

21 over 

22 ‘‘(II) the net long-term capital 

23 loss from such sales or dispositions.’’

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

25 such Code, as redesignated by paragraph (2), is 
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1 amended by striking ‘‘subparagraph (A)’’ and insert2 ing ‘‘subparagraph (A) or (B)’’. 

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

4 Code is amended by inserting ‘‘the maximum rate 

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

6 (d) TREATMENT OF DIVIDENDS RECEIVED FROM

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

8 the Internal Revenue Code of 1986 (relating to restric9 tions applicable to dividends received from real estate in10 vestment trusts) is amended to read as follows: 

11 ‘‘(c) RESTRICTIONS APPLICABLE TO DIVIDENDS RE12 CEIVED FROM REAL ESTATE INVESTMENT TRUSTS.—

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

14 1(h)(13) (relating to maximum rate of tax on divi15 dends and interest) and section 243 (relating to de16 ductions received by corporations), a dividend re17 ceived from a real estate investment trust which 

18 meets the requirements of this part shall not be con19 sidered a dividend. 

20 ‘‘(2) TREATMENT AS INTEREST.—

21 ‘‘(A) IN GENERAL.—For purposes of sec22 tion 1(h)(13), in the case of a dividend (other 

23 than a capital gain dividend, as defined in sub24 section (b)(3)(C)) received from a real estate 

25 investment trust which meets the requirements 
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1 of this part for the taxable year in which it 

2 paid—

3 ‘‘(i) such dividend shall be treated as 

4 interest if the aggregate interest received 

5 by the real estate investment trust for the 

6 taxable year equals or exceeds 75 percent 

7 of its gross income, or 

8 ‘‘(ii) if clause (i) does not apply, the 

9 portion of such dividend which bears the 

10 same ratio to the amount of such dividend 

11 as the aggregate interest received bears to 

12 gross income shall be treated as interest. 

13 ‘‘(B) ADJUSTMENTS TO GROSS INCOME

14 AND AGGREGATE INTEREST RECEIVED.—For 

15 purposes of subparagraph (B)—

16 ‘‘(i) gross income does not include the 

17 net capital gain, 

18 ‘‘(ii) gross income and aggregate in19 terest received shall each be reduced by so 

20 much of the deduction allowable by section 

21 163 for the taxable year (other than for in22 terest on mortgages on real property 

23 owned by the real estate investment trust) 

24 as does not exceed aggregate interest re25 ceived by the taxable year, and 
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1 ‘‘(iii) gross income shall be reduced by 

2 the sum of the taxes imposed by para3 graphs (4), (5), and (6) of section 857(b). 

4 ‘‘(C) AGGREGATE INTEREST RECEIVED.—

5 For purposes of this subsection, aggregate in6 terest received shall be computed by taking into 

7 account only interest which is described in sec8 tion 1(13)(C). 

9 ‘‘(D) NOTICE TO SHAREHOLDERS.—The 

10 amount of any distribution by a real estate in11 vestment trust which may be taken into account 

12 as interest for purposes of section 1(h)(13) 

13 shall not exceed the amount so designated by 

14 the trust in a written notice to its shareholders 

15 mailed not later than 45 days after the close of 

16 its taxable year.’’

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

18 this section shall apply to taxable years beginning after 

19 December 31, 2002.

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