I
103D CONGRESS
2D SESSION
H. R. 5124
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 HOUSE OF REPRESENTATIVES
SEPTEMBER 28, 1994
Mr. REYNOLDS introduced the following bill; which was referred to the
Committee on Ways and Means
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.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. LIMITATION ON INTEREST DEDUCTION AL-
LOWED CORPORATIONS.
(a) IN GENERAL.—Section 163 of the Internal Reve-
nue Code of 1986 (relating to deduction for interest) is
amended by redesignating subsection (k) as subsection (l)
and by inserting after subsection (j) the following new sub-
section:
‘‘(k) LIMITATION ON CORPORATE INTEREST PAY-
MENTS.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), in the case of a corporation, the amount
otherwise allowed as a deduction under this chapter
for interest paid or accrued during the taxable year
by such corporation shall be reduced by 20 percent.
‘‘(2) EXCEPTION
FOR
CERTAIN
CORPORA-
TIONS.—
‘‘(A) IN
GENERAL.—Paragraph (1) shall
not apply for any taxable year to any corpora-
tion the earnings and profits of which for such
taxable year (computed as of the close of the
taxable year without diminution by reason of
any dividend distributions made during such
taxable year) do not exceed the lesser of—
‘‘(i) the corporation’s tax liability
under this chapter for such taxable year
(determined after the application of para-
graph (1)), or
‘‘(ii) $100,000.
‘‘(B) CONTROLLED GROUP.—For purposes
of subparagraph (A), all component members of
a controlled group (as defined in section
179(d)(7)) shall be treated as 1 corporation.
‘‘(3) EXCEPTION FOR FARMING BUSINESSES.—
Paragraph (1) shall not apply to any corporation
substantially all of the assets of which are used in
the active conduct of a farming business (as defined
in section 448(d)(1)).’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1993.
SEC. 2. DIVIDEND PAID DEDUCTION.
(a) GENERAL RULE.—Part VIII of subchapter B of
chapter 1 of the Internal Revenue Code of 1986 (relating
to special deductions for corporations) is amended by
striking the table of sections and section 241 and inserting
the following:
‘‘Subpart A. Dividend paid deduction.
‘‘Subpart B. Dividend received deduction.
‘‘Subpart C. Miscellaneous provisions.
‘‘SEC. 230. ALLOWANCE OF SPECIAL DEDUCTIONS.
‘‘In addition to the deductions provided in part VI
(section 161 and following), there shall be allowed as de-
ductions in computing taxable income the items specified
in this part.
‘‘Subpart A—Dividend Paid Deduction
‘‘Sec. 231. Dividend paid deduction.
‘‘Sec. 232. Qualified dividend account.
‘‘Sec. 233. Ineligible corporations.
‘‘Sec. 234. Special rules.
‘‘SEC. 231. DIVIDEND PAID DEDUCTION.
‘‘(a) ALLOWANCE OF DEDUCTION.—In the case of a
corporation, there shall be allowed as a deduction an
amount equal to 50 percent of the dividends paid by such
corporation during the taxable year.
‘‘(b) LIMITATION BASED ON AMOUNT IN QUALIFIED
DIVIDEND ACCOUNT.—The amount of the dividends paid
during any taxable year which may be taken into account
under subsection (a) shall not exceed the amount in the
corporation’s qualified dividend account as of the close of
such taxable year determined after the application of sec-
tion 232(b)(1) for the taxable year but before the applica-
tion of section 232(b)(2) for such taxable year.
‘‘SEC. 232. QUALIFIED DIVIDEND ACCOUNT.
‘‘(a) ESTABLISHMENT OF ACCOUNT.—Each corpora-
tion shall establish a qualified dividend account. The open-
ing balance of such account shall be zero.
‘‘(b) ADJUSTMENTS TO ACCOUNTS.—As of the close
of each taxable year beginning after January 1, 1993, the
qualified dividend account—
‘‘(1) shall be increased by the adjusted taxable
income of the corporation for the taxable year, and
‘‘(2) shall be reduced by the amount of the divi-
dends paid by the corporation during the taxable
year to the extent the amount so paid does not ex-
ceed the limitation of section 231(c).
‘‘(c) ADJUSTED TAXABLE INCOME.—For purposes of
this section—
‘‘(1) IN GENERAL.—The term ‘adjusted taxable
income’ means taxable income adjusted as provided
in this subsection.
‘‘(2) ADJUSTMENT FOR CERTAIN QUALIFYING
DIVIDENDS.—Taxable income shall be increased by
the deduction allowed under section 243 with respect
to that portion of any qualifying dividend (as defined
in section 243(b)(1)) for which such deduction is de-
termined at a rate of less than 100 percent. Similar
rules shall apply in the case of dividends for which
deductions are allowable under section 245(b).
‘‘(3) ADJUSTMENT FOR TAX CREDITS.—
‘‘(A) IN GENERAL.—Taxable income shall
be reduced by the deduction equivalent of the
tentative nonrefundable credits for the taxable
year.
‘‘(B) DEDUCTION EQUIVALENT.—For pur-
poses of subparagraph (A), the deduction equiv-
alent of the tentative nonrefundable credits for
any taxable year is the amount which (if al-
lowed as a deduction for the taxable year)
would reduce the tax liability (as defined in sec-
tion 26(b)) for the taxable year by an amount
equal to the tentative nonrefundable credits.
‘‘(C) TENTATIVE NONREFUNDABLE CRED-
ITS.—For purposes of this paragraph, the term
‘tentative nonrefundable credits’ means the
amount of the credits which would have been
allowable under part IV of subchapter A of this
chapter for the taxable year (other than the
credit allowable under section 34) if no deduc-
tion were allowable under section 231.
‘‘(4) ADJUSTMENT FOR CORPORATE MINIMUM
TAX.—If tax is imposed by section 55 on the cor-
poration for any taxable year, taxable income for the
succeeding taxable year shall be increased by an
amount equal to 35⁄100 of the amount of tax so im-
posed.
‘‘(5) DIVIDEND PAID DEDUCTION NOT TAKEN
INTO
ACCOUNT.—Taxable income shall be deter-
mined without regard to the deduction allowed under
section 231.
‘‘SEC. 233. INELIGIBLE CORPORATIONS.
‘‘(a) GENERAL RULE.—No deduction shall be allowed
under section 231 with respect to any dividend paid by—
‘‘(1) a regulated investment company,
‘‘(2) a real estate investment trust,
‘‘(3) an S corporation,
‘‘(4) any organization taxable under subchapter
T of this chapter (relating to cooperative organiza-
tions), or
‘‘(5) a FSC or DISC.
‘‘(b) FOREIGN CORPORATIONS.—In the case of a for-
eign corporation—
‘‘(1) no deduction shall be allowed under section
231 for dividends paid by such corporation during
any taxable year unless the corporation meets the
requirements of section 245(a) for such taxable year,
‘‘(2) only adjusted taxable income effectively
connected with the conduct of a trade or business in
the United States and attributable to the uninter-
rupted period referred to in section 245(a) shall be
added to the qualified dividend account, and
‘‘(3) any distribution shall be treated as made
ratably out of income effectively connected with the
conduct of a trade or business in the United States
and other income.
‘‘SEC. 234. SPECIAL RULES.
‘‘(a) CERTAIN DISTRIBUTIONS NOT TREATED
AS
DIVIDENDS.—For purposes of this subpart, the term ‘divi-
dend’ does not include—
‘‘(1) any distribution in redemption of stock, in
liquidation, or in a reorganization (whether or not
such distribution is treated as a distribution to
which section 301 applies), and
‘‘(2) any dividend described in section 244 (re-
lating to dividends received on certain preferred
stock).
‘‘(b) DEDUCTION NOT TAKEN INTO ACCOUNT FOR
PURPOSES OF CERTAIN LIMITATIONS BASED ON TAX-
ABLE INCOME.—For purposes of sections 246(c), 613,
613A, and 593, taxable income shall be determined with-
out regard to the deduction allowed under section 231.
‘‘(c) TREATMENT OF DIVIDENDS RECEIVED BY 5-
PERCENT TAX-EXEMPT SHAREHOLDERS.—
‘‘(1) IN GENERAL.—For purposes of part III of
subchapter F (relating to taxation of unrelated busi-
ness income of certain exempt organizations), any
dividend received by a tax-exempt organization from
a corporation in which such organization is a 5-per-
cent shareholder shall be treated as unrelated busi-
ness taxable income to the extent of the amount of
the deduction allowable under section 231 to such
corporation with respect to such dividend. Except as
provided in regulations, the amount of such deduc-
tion shall be determined on the basis of the return
filed by the corporation for the taxable year.
‘‘(2) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) 
5-PERCENT
SHAREHOLDER.—The
term ‘5-percent shareholder’ means any tax-ex-
empt organization which owns (or is considered
as owning within the meaning of section 318)—
‘‘(i) 5 percent or more (by value) of
the outstanding stock of the corporation,
or
‘‘(ii) stock possessing 5 percent or
more of the total combined voting power of
all stock of the corporation.
‘‘(B) TAX-EXEMPT
ORGANIZATION.—The
term ‘tax-exempt organization’ means any orga-
nization which is exempt from the tax imposed
by this chapter.
‘‘(C) RELATED
ENTITIES.—A tax-exempt
organization and 1 or more other tax-exempt
organizations which have—
‘‘(i) significant common purposes and
substantial common membership, or
‘‘(ii) directly or indirectly substantial
common direction or control, shall be treat-
ed as 1 tax-exempt organization for pur-
poses of this paragraph.
‘‘(d) 
TREATMENT
OF
SUBSEQUENT
ADJUST-
MENTS.—If there is any adjustment which affects the
amount of the adjusted taxable income of a corporation
for any taxable year (whether by reason of any carryback
to such taxable year or otherwise) for purposes of this sub-
part and subpart B, the amount of such adjustment shall
be treated as made as of the close of such taxable year.
‘‘(e) ALLOCATION
OF QUALIFIED DIVIDEND AC-
COUNT IN CORPORATE SEPARATIONS, REORGANIZATIONS,
AND REDEMPTIONS.—Adjustments similar to the adjust-
ments provided in subsection (h) or (n)(7) of section 312
shall be made to the qualified dividend account in the case
of a transaction described in either of such subsections.
‘‘(f) MUTUAL LIFE INSURANCE COMPANIES.—
‘‘(1) GENERAL RULE.—In the case of a mutual
life insurance company, for purposes of this subpart,
80 percent of the differential earnings amount (as
defined in section 809(a)(3)) shall be treated as a
dividend paid to a shareholder.
‘‘(2) REGULATIONS.—The Secretary may pre-
scribe regulations applying rules consistent with this
subpart to mutual life insurance companies. Such
regulations may include rules treating an appro-
priate portion of the recomputed differential earn-
ings amount (as defined in section 809(f)(3)) as an
adjustment to the amount described in paragraph
(1).
‘‘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 port-
folio stock is debt financed.
‘‘Sec. 247. Dividends paid on certain preferred stock of public
utilities.’’.
(b) COMPENSATORY WITHHOLDING TAX ON DIVI-
DENDS PAID
TO NONRESIDENT ALIENS
OR FOREIGN
CORPORATIONS.—
(1) GENERAL RULE.—Subpart D of part II of
subchapter N of chapter 1 (relating to miscellaneous
provisions) is amended by adding at the end thereof
the following new section:
‘‘SEC. 899. ADDITIONAL TAX ON DIVIDENDS TO REFLECT
DIVIDEND PAID DEDUCTION.
‘‘(a) GENERAL RULE.—In addition to any tax im-
posed by section 871 or 881, there is hereby imposed a
tax equal to 30.4 percent of the dividends received from
sources within the United States by a nonresident alien
individual or foreign corporation.
‘‘(b) TAX NOT TO APPLY TO SHAREHOLDER’S EF-
FECTIVELY CONNECTED ITEMS.—The tax imposed by this
section shall not apply to any dividend to the extent such
dividend is effectively connected with the conduct of a
trade or business by the shareholder within the United
States.
‘‘(c) CORRESPONDING INCREASE IN WITHHOLDING
TAX.—In the case of any dividend subject to tax under
subsection (a), the tax imposed by section 1441 or 1442
(as the case may be) shall be increased by an amount
equal to the applicable percentage of such dividend.
‘‘(d) EXCEPTION
FOR
CERTAIN
TREATY
COUN-
TRIES.—The tax imposed by subsection (a) shall not apply
to any dividend paid to a resident or corporation of a for-
eign country during any period—
‘‘(1) in which an income tax treaty between
such country and the United States is in effect, and
‘‘(2) during which there is in effect a certifi-
cation by the Secretary that—
‘‘(A) such income tax treaty has adequate
provisions to prevent treaty shopping, and
‘‘(B) if such foreign country imposes an in-
come tax comparable to the tax imposed by this
subtitle and grants relief from such tax to its
residents, such country grants relief equivalent
to that provided in section 231 with respect to
dividends paid to United States persons.