(ii) the sum of the amounts on which
a tax is determined under subparagraphs
(A) and (B).
(2) The amount of tax determined under sub-
paragraph (C) of section (1)(h)(1) of such Code
shall be the sum of—
(A) 15 percent of the lesser of—
(i) the excess (if any) of the amount
of net capital gain determined under sub-
paragraph (A)(i) of paragraph (1) of this
subsection over the amount on which a tax
is determined under subparagraph (A) of
paragraph (1) of this subsection, or
(ii) the amount on which a tax is de-
termined under such subparagraph (C)
(without regard to this subsection), plus
(B) 20 percent of the excess (if any) of—
(i) the amount on which a tax is de-
termined under such subparagraph (C)
(without regard to this subsection), over
(ii) the amount on which a tax is de-
termined under subparagraph (A) of this
paragraph.
(3) For purposes of applying section 55(b)(3)
of such Code, rules similar to the rules of para-
graphs (1) and (2) of this subsection shall apply.
(4) In applying this subsection with respect to
any pass-thru entity, the determination of when
gains and loss are properly taken into account shall
be made at the entity level.
(5) For purposes of applying section 1(h)(11)
of such Code, as added by section 302 of this Act,
to this subsection, dividends which are qualified divi-
dend income shall be treated as gain properly taken
into account for the portion of the taxable year on
or after May 6, 2003.
(6) Terms used in this subsection which are
also used in section 1(h) of such Code shall have the
respective meanings that such terms have in such
section.
(d) EFFECTIVE DATES.—
(1) IN
GENERAL.—Except as otherwise pro-
vided by this subsection, the amendments made by
this section shall apply to taxable years ending on or
after May 6, 2003.
(2) WITHHOLDING.—The amendment made by
subsection (a)(2)(C) shall apply to amounts paid
after the date of the enactment of this Act.
(3) SMALL
BUSINESS
STOCK.—The amend-
ments made by subsection (b)(3) shall apply to dis-
positions on or after May 6, 2003.
SEC. 302. DIVIDENDS OF INDIVIDUALS TAXED AT CAPITAL
GAIN RATES.
(a) IN GENERAL.—Section 1(h) (relating to max-
imum capital gains rate), as amended by section 301, is
amended by adding at the end the following new para-
graph:
‘‘(11) DIVIDENDS
TAXED
AS
NET
CAPITAL
GAIN.—
‘‘(A) IN GENERAL.—For purposes of this
subsection, the term ‘net capital gain’ means
net capital gain (determined without regard to
this paragraph), increased by qualified dividend
income.
‘‘(B) QUALIFIED DIVIDEND INCOME.—For
purposes of this paragraph—
‘‘(i) IN GENERAL.—The term ‘quali-
fied dividend income’ means dividends re-
ceived during the taxable year from domes-
tic corporations.
‘‘(ii) 
CERTAIN
DIVIDENDS
EX-
CLUDED.—Such term shall not include—
‘‘(I) any dividend from a corpora-
tion which for the taxable year of the
corporation in which the distribution
is made, or the preceding taxable
year, is a corporation exempt from tax
under section 501 or 521,
‘‘(II) any amount allowed as a
deduction under section 591 (relating
to deduction for dividends paid by
mutual savings banks, etc.), and
‘‘(III) any dividend described in
section 404(k).
‘‘(iii) EXCLUSION OF CERTAIN DIVI-
DENDS.—Such term shall not include any
dividend on any share of stock—
‘‘(I) with respect to which the
holding period requirements of section
246(c) are not met, or
‘‘(II) to the extent that the tax-
payer is under an obligation (whether
pursuant to a short sale or otherwise)
to make related payments with respect
to positions in substantially similar or
related property.
‘‘(C) SPECIAL RULES.—
‘‘(i) AMOUNTS TAKEN INTO ACCOUNT
AS INVESTMENT INCOME.—Qualified divi-
dend income shall not include any amount
which the taxpayer takes into account as
investment 
income 
under 
section
163(d)(4)(B).
‘‘(ii) EXTRAORDINARY
DIVIDENDS.—
If an individual receives, with respect to
any share of stock, qualified dividend in-
come from 1 or more dividends which are
extraordinary dividends (within the mean-
ing of section 1059(c)), any loss on the
sale or exchange of such share shall, to the
extent of such dividends, be treated as
long-term capital loss.
‘‘(iii) TREATMENT
OF
DIVIDENDS
FROM
REGULATED
INVESTMENT
COMPA-
NIES
AND
REAL
ESTATE
INVESTMENT
TRUSTS.—A dividend received from a regu-
lated investment company or a real estate
investment trust shall be subject to the
limitations prescribed in sections 854 and
857.’’.
(b) EXCLUSION OF DIVIDENDS FROM INVESTMENT
INCOME.—Subparagraph (B) of section 163(d)(4) (defin-
ing net investment income) is amended by adding at the
end the following flush sentence:
‘‘Such term shall include qualified dividend in-
come (as defined in section 1(h)(11)(B)) only to
the extent the taxpayer elects to treat such in-
come as investment income for purposes of this
subsection.’’.
(c) TREATMENT OF DIVIDENDS FROM REGULATED
INVESTMENT COMPANIES.—
(1) Subsection (a) of section 854 (relating to
dividends received from regulated investment compa-
nies) is amended by inserting ‘‘section 1(h)(11) (re-
lating to maximum rate of tax on dividends and in-
terest) and’’ after ‘‘For purposes of’’.
(2) Paragraph (1) of section 854(b) (relating to
other dividends) is amended by redesignating sub-
paragraph (B) as subparagraph (C) and by inserting
after subparagraph (A) the following new subpara-
graph:
‘‘(B) MAXIMUM
RATE
UNDER
SECTION
1(h).—
‘‘(i) IN GENERAL.—If the aggregate
dividends received by a regulated invest-
ment company during any taxable year are
less than 95 percent of its gross income,