by inserting before the period ‘‘, and (ii) the deduc-
tion under section 1203 (relating to capital gains de-
duction) shall not be taken into account’’.
(12) Paragraph (4) of section 691(c) is amend-
ed by striking ‘‘1(h),’’ and by inserting ‘‘1203,’’
after ‘‘1202,’’.
(13) The second sentence of paragraph (2) of
section 871(a) is amended by striking ‘‘section
1202’’ and inserting ‘‘sections 1202 and 1203’’.
(14)(A) Paragraph (2) of section 904(b) is
amended by striking subparagraphs (A) and (C), by
redesignating subparagraph (B) as subparagraph
(A), and by inserting after subparagraph (A) (as so
redesignated) the following new subparagraph:
‘‘(B) OTHER TAXPAYERS.—In the case of
a taxpayer other than a corporation, taxable in-
come from sources outside the United States
shall include gain from the sale or exchange of
capital assets only to the extent of foreign
source capital gain net income.’’
(B) Subparagraph (A) of section 904(b)(2), as
so redesignated, is amended—
(i) by striking all that precedes clause (i)
and inserting the following:
‘‘(A) CORPORATIONS.—In the case of a
corporation—’’, and
(ii) by striking in clause (i) ‘‘in lieu of ap-
plying subparagraph (A),’’.
(C) Paragraph (3) of section 904(b) is amended
by striking subparagraphs (D) and (E) and inserting
the following new subparagraph:
‘‘(D) RATE DIFFERENTIAL PORTION.—The
rate differential portion of foreign source net
capital gain, net capital gain, or the excess of
net capital gain from sources within the United
States over net capital gain, as the case may
be, is the same proportion of such amount as
the excess of the highest rate of tax specified in
section 11(b) over the alternative rate of tax
under section 1201(a) bears to the highest rate
of tax specified in section 11(b).’’
(15) Paragraph (1) of section 1402(i) is amend-
ed by inserting ‘‘, and the deduction provided by sec-
tion 1203 shall not apply’’ before the period at the
end thereof.
(16) Paragraph (1) of section 1445(e) is
amended by striking ‘‘20 percent’’ and inserting
‘‘23.7 percent’’.
(17)(A) 
The 
second 
sentence 
of 
section
7518(g)(6)(A) is amended—
(i) by striking ‘‘during a taxable year to
which section 1(h) or 1201(a) applies’’, and
(ii) by striking ‘‘20 percent’’ and inserting
‘‘23.7 percent’’.
(B) 
The 
second 
sentence 
of 
section
607(h)(6)(A) of the Merchant Marine Act, 1936, is
amended—
(i) by striking ‘‘during a taxable year to
which section 1(h) or 1201(a) of such Code ap-
plies’’, and
(ii) by striking ‘‘20 percent’’ and inserting
‘‘23.7 percent’’.
(e) CLERICAL AMENDMENT.—The table of sections
for part I of subchapter P of chapter 1 is amended by
adding at the end the following new item:
‘‘Sec. 1203. Capital gains deduction.’’
(f) EFFECTIVE DATES.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by
this section shall apply to taxable years beginning
after December 31, 1998.
(2) WITHHOLDING.—The amendments made by
subsection (d)(16) shall apply only to amounts paid
after December 31, 1998.
(3) REPEAL OF ELECTION.—Section 311 of the
Taxpayer Relief Act of 1997 is amended by striking
subsection (e).
(4) COORDINATION
WITH
PRIOR
TRANSITION
RULE.—Any amount treated as long-term capital
gain by reason of paragraph (3) of section 1122(h)
of the Tax Reform Act of 1986 shall not be taken
into account for purposes of applying section 1203
of the Internal Revenue Code of 1986 (as added by
this section).
Æ