I 
108TH CONGRESS 
1ST SESSION 
H. R. 2
To amend the Internal Revenue Code of 1986 to provide additional tax 
incentives to encourage economic growth. 
IN THE HOUSE OF REPRESENTATIVES 
FEBRUARY 27, 2003
Mr. THOMAS 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 provide 
additional tax incentives to encourage economic growth.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE; REFERENCES; TABLE OF CON-
TENTS. 
(a) SHORT TITLE.—This Act may be cited as the 
‘‘Jobs and Growth Tax Act of 2003’’. 
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
ment or repeal is expressed in terms of an amendment 
to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986. 
(c) TABLE OF CONTENTS.—The table of contents of 
this Act is as follows:
Sec. 1. Short title; references; table of contents. 
TITLE I—ACCELERATION OF CERTAIN PREVIOUSLY ENACTED 
TAX REDUCTIONS; INCREASED EXPENSING FOR SMALL BUSI-
NESSES 
Sec. 101. Acceleration of 10-percent individual income tax rate bracket expan-
sion. 
Sec. 102. Acceleration of reduction in individual income tax rates. 
Sec. 103. Acceleration of 15-percent individual income tax rate bracket expan-
sion for married taxpayers filing joint returns. 
Sec. 104. Acceleration of increase in standard deduction for married taxpayers 
filing joint returns. 
Sec. 105. Acceleration of increase in child tax credit. 
Sec. 106. Increased expensing for small business. 
Sec. 107. Minimum tax relief to individuals. 
Sec. 108. Application of EGTRRA sunset to this title. 
TITLE II—DIVIDEND EXCLUSION TO ELIMINATE DOUBLE 
TAXATION OF CORPORATE EARNINGS 
Sec. 201. Dividend exclusion to eliminate double taxation of corporate earnings. 
Sec. 202. Rules for application of dividend exclusion and retained earnings 
basis adjustments. 
Sec. 203. Treatment of regulated investment companies and real estate invest-
ment trusts. 
Sec. 204. Treatment of insurance companies. 
Sec. 205. Treatment of S corporations. 
Sec. 206. Repeal of accumulated earnings tax and personal holding company 
tax. 
Sec. 207. Effective dates.
TITLE 
I—ACCELERATION 
OF 
CERTAIN 
PREVIOUSLY 
EN-
ACTED TAX REDUCTIONS; IN-
CREASED 
EXPENSING 
FOR 
SMALL BUSINESSES 
SEC. 101. ACCELERATION OF 10-PERCENT INDIVIDUAL IN-
COME TAX RATE BRACKET EXPANSION. 
(a) IN GENERAL.—Clause (i) of section 1(i)(1)(B) 
(relating to the initial bracket amount) is amended by 
striking ‘‘($12,000 in the case of taxable years beginning 
before January 1, 2008)’’. 
(b) INFLATION ADJUSTMENT BEGINNING IN 2003.—
Section 1(i)(1)(C) (relating to inflation adjustment) is 
amended to read as follows: 
‘‘(C) INFLATION
ADJUSTMENT.—In pre-
scribing the tables under subsection (f) which 
apply with respect to taxable years beginning in 
calendar years after 2002—
‘‘(i) the cost-of-living adjustment used 
in making adjustments to the initial brack-
et amount shall be determined under sub-
section (f)(3) by substituting ‘2001’ for 
‘1992’ in subparagraph (B) thereof, and
(d) shall be 1⁄2 of the amounts determined 
under subparagraph (A).’’. 
(b) CONFORMING AMENDMENTS.—
(1) The heading for subsection (f ) of section 1 
is amended by striking ‘‘PHASEOUT’’ and inserting 
‘‘ELIMINATION’’. 
(2) Section 302(c) of the Economic Growth and 
Tax Relief Reconciliation Act of 2001 is amended by 
striking ‘‘2004’’ and inserting ‘‘2002’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002. 
SEC. 104. ACCELERATION OF INCREASE IN STANDARD DE-
DUCTION FOR MARRIED TAXPAYERS FILING 
JOINT RETURNS. 
(a) IN GENERAL.—Paragraph (2) of section 63(c) 
(relating to basic standard deduction) is amended to read 
as follows: 
‘‘(2) BASIC STANDARD DEDUCTION.—For pur-
poses of paragraph (1), the basic standard deduction 
is—
‘‘(A) 200 percent of the dollar amount in 
effect under subparagraph (C) for the taxable 
year in the case of—
‘‘(i) a joint return, or
‘‘(ii) a surviving spouse (as defined in 
section 2(a)), 
‘‘(B) $4,400 in the case of a head of 
household (as defined in section 2(b)), or 
‘‘(C) $3,000 in any other case.’’. 
(b) CONFORMING AMENDMENTS.—
(1) Section 63(c)(4) is amended by striking 
‘‘(2)(D)’’ each place it occurs and inserting 
‘‘(2)(C)’’. 
(2) Section 63(c) is amended by striking para-
graph (7). 
(3) Section 301(d) of the Economic Growth and 
Tax Relief Reconciliation Act of 2001 is amended by 
striking ‘‘2004’’ and inserting ‘‘2002’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002.
SEC. 105. ACCELERATION OF INCREASE IN CHILD TAX 
CREDIT. 
(a) IN GENERAL.—Subsection (a) of section 24 (re-
lating to child tax credit) is amended to read as follows: 
‘‘(a) ALLOWANCE OF CREDIT.—There shall be al-
lowed as a credit against the tax imposed by this chapter 
for the taxable year with respect to each qualifying child 
of the taxpayer an amount equal to $1,000.’’.
(b) ADVANCE PAYMENT OF PORTION OF INCREASED 
CREDIT IN 2003.—
(1) IN GENERAL.—Subchapter B of chapter 65 
(relating to abatements, credits, and refunds) is 
amended by adding at the end the following new sec-
tion: 
‘‘SEC. 6429. ADVANCE PAYMENT OF PORTION OF IN-
CREASED CHILD CREDIT. 
‘‘(a) IN GENERAL.—Each eligible taxpayer shall be 
treated as having made a payment against the tax imposed 
by chapter 1 for such taxpayer’s first taxable year begin-
ning in 2002 in an amount equal to the child tax credit 
refund amount. 
‘‘(b) ELIGIBLE TAXPAYER.—For purposes of this 
section, the term ‘eligible taxpayer’ means any taxpayer 
if—
‘‘(1) such taxpayer was allowed a credit under 
section 24 for such taxpayer’s first taxable year be-
ginning in 2002, and 
‘‘(2) at least one qualifying child (as defined in 
section 24(c)) of the taxpayer for such year meets 
the age requirement for 2003. 
‘‘(c) CHILD TAX CREDIT REFUND AMOUNT.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the child tax credit refund amount is equal to 
the excess (if any) of—
‘‘(A) the amount which would have been 
allowed as a credit under section 24 for the tax-
payer’s first taxable year beginning in 2002 
if—
‘‘(i) the per child amount for such 
year were $1,000, and 
‘‘(ii) only qualifying children (as de-
fined in section 24(c)) of the taxpayer for 
such year who meet the age requirement 
for 2003 were taken into account, over 
‘‘(B) the amount which would have been 
allowed as a credit under section 24 for the tax-
payer’s first taxable year beginning in 2002 if 
only qualifying children (as defined in section 
24(c)) of the taxpayer for such year who meet 
the age requirement for 2003 were taken into 
account. 
‘‘(2) ADJUSTMENTS.—The amounts described 
in subparagraphs (A) and (B) of paragraph (1) shall 
be determined—
‘‘(A) 
without 
regard 
to 
section 
24(d)(1)(B)(ii), and
‘‘(B) as if the credit allowed under section 
24(d) were allowed under section 24. 
‘‘(d) AGE REQUIREMENT.—A child of a taxpayer 
meets the age requirement for 2003 if such child meets 
the requirement of section 24(c)(1)(B) for the taxpayer’s 
first taxable year beginning in 2003. 
‘‘(e) TIMING OF PAYMENTS.—In the case of any over-
payment attributable to this section, the Secretary shall, 
subject to the provisions of this title, refund or credit such 
overpayment as rapidly as possible and, to the extent prac-
ticable, before December 31, 2003. 
‘‘(f) COORDINATION WITH CHILD TAX CREDIT.—
‘‘(1) IN
GENERAL.—The amount of credit 
which would (but for this paragraph) be allowable 
under section 24 for the taxpayer’s first taxable year 
beginning in 2003 shall be reduced (but not below 
zero) by the aggregate refunds and credits made or 
allowed to the taxpayer under this section. Any fail-
ure to so reduce the credit shall be treated as arising 
out of a mathematical or clerical error and assessed 
according to section 6213(b)(1). 
‘‘(2) JOINT RETURNS.—In the case of a refund 
or credit made or allowed under this section with re-
spect to a joint return, half of such refund or credit
shall be treated as having been made or allowed to 
each individual filing such return. 
‘‘(g) NO INTEREST.—No interest shall be allowed on 
any overpayment attributable to this section.’’. 
(2) CLERICAL AMENDMENT.—The table of sec-
tions for subchapter B of chapter 65 is amended by 
adding at the end the following new item:
‘‘Sec. 6429. Advance payment of portion of increased child credit.’’.
(c) EFFECTIVE DATES.—
(1) SUBSECTION (a).—The amendment made 
by subsection (a) shall apply to taxable years begin-
ning after December 31, 2002. 
(2) SUBSECTION (b).—The amendments made 
by subsection (b) shall take effect on the date of the 
enactment of this Act. 
SEC. 106. INCREASED EXPENSING FOR SMALL BUSINESS. 
(a) IN GENERAL.—Paragraph (1) of section 179(b) 
(relating to dollar limitation) is amended to read as fol-
lows: 
‘‘(1) DOLLAR LIMITATION.—The aggregate cost 
which may be taken into account under subsection 
(a) for any taxable year shall not exceed $75,000.’’. 
(b) INCREASE
IN
QUALIFYING
INVESTMENT
AT 
WHICH PHASEOUT BEGINS.—Paragraph (2) of section 
179(b) (relating to reduction in limitation) is amended by 
striking ‘‘$200,000’’ and inserting ‘‘$325,000’’.
(c) OFF-THE-SHELF COMPUTER SOFTWARE.—Para-
graph (1) of section 179(d) (defining section 179 prop-
erty) is amended to read as follows: 
‘‘(1) SECTION 179 PROPERTY.—For purposes of 
this section, the term ‘section 179 property’ means 
property—
‘‘(A) which is—
‘‘(i) tangible property (to which sec-
tion 168 applies), or 
‘‘(ii) computer software (as defined in 
section 197(e)(3)(B)) which is described in 
section 197(e)(3)(A)(i) and to which sec-
tion 167 applies, 
‘‘(B) which is section 1245 property (as 
defined in section 1245(a)(3)), and 
‘‘(C) which is acquired by purchase for use 
in the active conduct of a trade or business. 
Such term shall not include any property described 
in section 50(b) and shall not include air condi-
tioning or heating units.’’. 
(d) ADJUSTMENT OF DOLLAR LIMIT AND PHASEOUT 
THRESHOLD FOR INFLATION.—Subsection (b) of section 
179 (relating to limitations) is amended by adding at the 
end the following new paragraph: 
‘‘(5) INFLATION ADJUSTMENTS.—
‘‘(A) IN
GENERAL.—In the case of any 
taxable year beginning in a calendar year after 
2003, the dollar amounts in paragraphs (1) and 
(2) shall each be increased by an amount equal 
to—
‘‘(i) such dollar amount, multiplied by 
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) for the cal-
endar year in which the taxable year be-
gins, by substituting ‘calendar year 2002’ 
for ‘calendar year 1992’ in subparagraph 
(B) thereof. 
‘‘(B) ROUNDING.—
‘‘(i) DOLLAR
LIMITATION.—If the 
amount in paragraph (1) as increased 
under subparagraph (A) is not a multiple 
of $1,000, such amount shall be rounded 
to the nearest multiple of $1,000. 
‘‘(ii) PHASEOUT
AMOUNT.—If the 
amount in paragraph (2) as increased 
under subparagraph (A) is not a multiple 
of $10,000, such amount shall be rounded 
to the nearest multiple of $10,000.’’.
(e) REVOCATION OF ELECTION.—Paragraph (2) of 
section 179(c) (relating to election irrevocable) is amended 
to read as follows: 
‘‘(2) REVOCATION
OF
ELECTION.—The tax-
payer may revoke an election under paragraph (1), 
and any specification contained in any such election, 
with respect to any property. Such revocation, once 
made, shall be irrevocable.’’. 
(f) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002. 
SEC. 107. MINIMUM TAX RELIEF TO INDIVIDUALS. 
(a) IN GENERAL.—So much of paragraph (1) of sec-
tion 55(d) (relating to exemption amount for taxpayers 
other than corporations) as precedes subparagraph (C) 
thereof is amended to read as follows: 
‘‘(1) EXEMPTION
AMOUNT
FOR
TAXPAYERS 
OTHER THAN CORPORATIONS.—In the case of a tax-
payer other than a corporation, the term ‘exemption 
amount’ means as follows: 
‘‘(A) JOINT
RETURN
AND
SURVIVING 
SPOUSE.—In the case of a joint return or a sur-
viving spouse, the amount under the following 
table:
‘‘In the case of taxable years be-
ginning: 
The exemption amount is: 
Before 2001 .................................................................................
$45,000
‘‘In the case of taxable years be-
ginning: 
The exemption amount is: 
In 2001 and 2002 ........................................................................
$49,000
In 2003, 2004, and 2005 ............................................................
$57,000
After 2005 ...................................................................................
$45,000.
‘‘(B) INDIVIDUAL NOT MARRIED AND NOT 
A SURVIVING SPOUSE.—In the case of an indi-
vidual who is not a married individual and is 
not a surviving spouse, the amount under the 
following table:
‘‘In the case of taxable years be-
ginning: 
The exemption amount is: 
Before 2001 ................................................................................. $33,750
In 2001 and 2002 ........................................................................ $35,750
In 2003, 2004, and 2005 ............................................................ $39,750
After 2005 ................................................................................... $33,750.’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 55(d)(1)(C) is amended—
(A) by striking ‘‘, and’’ and inserting a pe-
riod, and 
(B) by striking ‘‘50 percent’’ and inserting 
‘‘MARRIED INDIVIDUAL FILING A SEPARATE RE-
TURN.—50 percent’’. 
(2) Section 55(d)(1)(D) is amended by striking 
‘‘$22,500’’ and inserting ‘‘ESTATE AND TRUST.—
$22,500’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002.
SEC. 108. APPLICATION OF EGTRRA SUNSET TO THIS TITLE. 
Each amendment made by this title (other than sec-
tion 106) shall be subject to title IX of the Economic 
Growth and Tax Relief Reconciliation Act of 2001 to the 
same extent and in the same manner as the provision of 
such Act to which such amendment relates.
TITLE II—DIVIDEND EXCLUSION 
TO ELIMINATE DOUBLE TAX-
ATION OF CORPORATE EARN-
INGS 
SEC. 201. DIVIDEND EXCLUSION TO ELIMINATE DOUBLE 
TAXATION OF CORPORATE EARNINGS. 
(a) IN GENERAL.—Part III of subchapter B of chap-
ter 1 is amended by inserting after section 115 the fol-
lowing new section:
‘‘SEC. 116. DIVIDEND EXCLUSION TO ELIMINATE DOUBLE 
TAXATION OF CORPORATE EARNINGS. 
‘‘(a) EXCLUSION.—Gross income does not include the 
excludable portion (as defined in section 281) of any 
amount received as a dividend. 
‘‘(b) COMPARABLE
TREATMENT
FOR
RETAINED 
EARNINGS.—If the excludable dividend amount (as de-
fined in section 281) of any corporation for any calendar 
year exceeds the dividends paid by the corporation in such 
calendar year, the basis of stock in the corporation shall
be increased in the manner and to the extent provided in 
section 282. 
‘‘(c) REPORTING TO SHAREHOLDERS.—For reporting 
to shareholders, see section 6042.’’ 
(b) CLERICAL AMENDMENT.—The table of sections 
for such part III is amended by inserting after the item 
relating to section 115 the following new item:
‘‘Sec. 116. Dividend exclusion to eliminate double taxation of cor-
porate earnings.’’
SEC. 202. RULES FOR APPLICATION OF DIVIDEND EXCLU-
SION AND RETAINED EARNINGS BASIS AD-
JUSTMENTS. 
(a) IN GENERAL.—Subchapter B of chapter 1 (as 
amended by subsection (d)) is amended by inserting after 
part IX the following new part: 
‘‘PART X—RULES FOR APPLICATION OF DIVI-
DEND EXCLUSION AND RETAINED EARNINGS 
BASIS ADJUSTMENTS.
‘‘Sec. 281. Excludable portion of dividends. 
‘‘Sec. 282. Retained earnings basis adjustments. 
‘‘Sec. 283. Treatment of distributions after previous retained 
earnings basis adjustments. 
‘‘Sec. 284. Special rules for credits and refunds. 
‘‘Sec. 285. Special rules for foreign corporations and shareholders. 
‘‘Sec. 286. Other special rules. 
‘‘Sec. 287. Regulations.
‘‘SEC. 281. EXCLUDABLE PORTION OF DIVIDENDS. 
‘‘(a) EXCLUDABLE PORTION.—For purposes of sec-
tion 116, the term ‘excludable portion’ means, with respect 
to any dividend paid by a corporation in a calendar year,
an amount which bears the same ratio to such dividend 
as the excludable dividend amount of such corporation for 
the calendar year bears to the total amount of dividends 
paid by such corporation in such calendar year. 
‘‘(b) EXCLUDABLE DIVIDEND AMOUNT.—For pur-
poses of this part and section 116—
‘‘(1) IN GENERAL.—The term ‘excludable divi-
dend amount’ means, with respect to any corpora-
tion for any calendar year, the excess of—
‘‘(A) the sum of—
‘‘(i) the fully taxed earnings amount 
for the preceding calendar year, 
‘‘(ii) the aggregate amount of divi-
dends received by the corporation during 
such preceding year which are excluded 
from gross income under section 116(a), 
and 
‘‘(iii) the aggregate amount of in-
creases during such preceding year under 
section 116(b) in the basis of stock held by 
the corporation, over 
‘‘(B) the amount of applicable income tax 
taken into account under subparagraph (A)(i). 
‘‘(2) CARRYOVER OF EXCESS OF EXCLUDABLE 
DIVIDEND AMOUNT OVER EARNINGS AND PROFITS.—
The excludable dividend amount of a corporation for 
any calendar year shall be increased by the excess 
of—
‘‘(A) the excludable dividend amount of 
such corporation for the preceding calendar 
year, over 
‘‘(B) the maximum amount which could 
have been paid by the corporation as dividends 
during such preceding calendar year. 
‘‘(c) FULLY TAXED EARNINGS AMOUNT.—
‘‘(1) IN GENERAL.—The fully taxed earnings 
amount for any calendar year is the amount of the 
applicable income tax shown on applicable returns 
for such year divided by the highest rate of tax spec-
ified in section 11. 
‘‘(2) INCREASE
FOR
PRIOR
YEAR
ASSESS-
MENTS.—The fully taxed earnings amount for any 
calendar year shall be increased by the amount of 
any applicable income tax (not previously taken into 
account under paragraph (1)) which is assessed dur-
ing such year divided by the highest rate of tax spec-
ified in section 11. 
‘‘(3) LIMITATION
TO
AMOUNT
PAID.—If an 
amount described in paragraph (1) or (2) is paid 
after the close of the calendar year in which such
amount would (but for this paragraph) be taken into 
account, such amount shall be taken into account for 
the calendar year in which paid. 
‘‘(4) HIGHEST RATE OF TAX.—For purposes of 
this subsection, the highest rate of tax specified in 
section 11 with respect to any applicable income tax 
shall be such highest rate for the taxable year for 
which (or by reference to which) such tax is deter-
mined. 
‘‘(d) DEFINITIONS.—For purposes of this part—
‘‘(1) APPLICABLE INCOME TAX.—
‘‘(A) IN GENERAL.—The term ‘applicable 
income tax’ means the excess (if any) of—
‘‘(i) the sum of the taxes imposed by 
sections 11, 55, 511, 801, 831, 882, 1201, 
1291 
(without 
regard 
to 
section 
1291(c)(1)(B)), and 1374, over 
‘‘(ii) the sum of the credits under part 
IV of subchapter A (other than subpart C 
and section 27(a)). 
‘‘(B) TRANSITIONAL RULES.—
‘‘(i) IN
GENERAL.—Such term shall 
not include any tax imposed for any tax-
able year ending before April 1, 2001.
‘‘(ii) TREATMENT
OF
MINIMUM
TAX 
CREDIT.—The applicable income tax shall 
not be reduced by the credit under section 
53 attributable (determined as if such 
credit were used on a first-in first-out 
basis) to taxable years ending before April 
1, 2001. 
‘‘(iii) SECTION
1374.—The reference 
to section 1374 in subparagraph (A)(i) 
shall not apply to taxable years beginning 
before January 1, 2003. 
‘‘(iv) OTHER TAXES INCLUDED.—The 
taxes imposed by sections 531 and 541 (as 
in effect before their repeal) shall be taken 
into account under subparagraph (A)(i) for 
taxable years ending after March 30, 2001, 
and beginning before January 1, 2003. 
‘‘(2) APPLICABLE RETURN.—
‘‘(A) IN GENERAL.—The term ‘applicable 
return’ means, with respect to a calendar year, 
any return of applicable income tax for a tax-
able year if the 15th day of the 8th month fol-
lowing the close of such taxable year occurs 
during such calendar year.
‘‘(B) FILING REQUIREMENT.—If a return 
is filed after the close of the calendar year with 
respect to which such return would (but for this 
subparagraph) be treated as an applicable re-
turn under subparagraph (A), such return shall 
be treated as an applicable return for the cal-
endar year in which filed. 
‘‘SEC. 282. RETAINED EARNINGS BASIS ADJUSTMENTS. 
‘‘(a) IN GENERAL.—If any portion of the excess de-
scribed in section 116(b) is allocated to a share of stock 
in a corporation under subsection (b), the basis of such 
share shall be increased by the amount so allocated. 
‘‘(b) ALLOCATION OF EXCESS.—
‘‘(1) IN GENERAL.—A corporation may allocate 
the excess described in section 116(b) for any cal-
endar year to shares of stock in the corporation at 
1 or more times during the calendar year to the ex-
tent that cash in the amount of such excess, if dis-
tributed at the time of such allocation, would be a 
dividend. 
‘‘(2) MANNER.—Except as provided in regula-
tions prescribed by the Secretary, any amount allo-
cated under paragraph (1) shall be allocated in the 
same manner as if cash in such amount were actu-
ally distributed as dividends. No allocation shall be
effective before the date on which it is made by the 
corporation. 
‘‘(3) EXCEPTION
FOR
CERTAIN
PREFERRED 
STOCK.—No amount may be allocated under this 
subsection to stock described in section 1504(a)(4) 
(determined without regard to subparagraph (A) 
thereof). 
‘‘(c) EFFECT ON EARNINGS AND PROFITS.—Earn-
ings and profits of a corporation making an allocation 
under subsection (b), and of a corporation receiving such 
an allocation, shall be adjusted in the same manner as 
if the allocation were treated as a dividend. 
‘‘(d) AUTHORITY
TO
ALLOW
CARRYOVER
OF 
UNALLOCATED
EXCESS
EXCLUDABLE
DIVIDEND 
AMOUNT.—Notwithstanding section 281, the Secretary 
may by regulation allow a corporation to increase the ex-
cludable dividend amount for any calendar year by the 
amount of the excess described in section 116(b) for the 
preceding calendar year which is not allocated under sub-
section (b). 
‘‘SEC. 283. TREATMENT OF DISTRIBUTIONS AFTER PRE-
VIOUS RETAINED EARNINGS BASIS ADJUST-
MENTS. 
‘‘(a) TREATMENT OF DISTRIBUTIONS.—
‘‘(1) IN GENERAL.—If a corporation makes dis-
tributions described in section 301(a) with respect to 
any class of stock in any calendar year which are 
not excludable under section 116(a), such distribu-
tions shall not be treated as dividends (and para-
graphs (2) and (3) of section 301(c) shall apply to 
such distributions) to the extent such distributions 
do not exceed the corporation’s cumulative retained 
earnings basis adjustment amount for such class as 
of the beginning of such year. If such distributions 
exceed such amount, this paragraph shall be applied 
to a proportionate share of each such distribution. 
‘‘(2) SPECIAL RULES FOR RECHARACTERIZED 
DIVIDENDS.—If any dividend (determined without 
regard to this subsection) during any calendar year 
with respect to any class of stock in a corporation 
is treated as a distribution other than a dividend 
under paragraph (1), such treatment shall be dis-
regarded for purposes of—
‘‘(A) determining the excludable portion 
under section 281 of dividends paid by the cor-
poration during the calendar year, and 
‘‘(B) determining whether any distribution 
during the calendar year with respect to stock 
in the corporation is treated as a dividend.
‘‘(b) CUMULATIVE RETAINED EARNINGS BASIS AD-
JUSTMENT AMOUNT.—For purposes of this section, the 
term ‘cumulative retained earnings basis adjustment 
amount’ means, with respect to any class of stock for any 
calendar year, the excess (if any) of—
‘‘(1) the aggregate of the excess described in 
section 116(b) allocated to shares of such class of 
stock under section 282 for all preceding calendar 
years, over 
‘‘(2) the aggregate amount of distributions to 
which subsection (a)(1) applies with respect to such 
class of stock for all preceding calendar years. 
‘‘SEC. 284. SPECIAL RULES FOR CREDITS AND REFUNDS. 
‘‘(a) IN GENERAL.—No overpayment of an applicable 
income tax may be allowed as a credit or refund to the 
extent that the overpayment exceeds the sum of—
‘‘(1) the aggregate applicable income taxes for 
the calendar year in which the credit or refund 
would otherwise be allowed or made, and 
‘‘(2) an amount equal to the lesser of—
‘‘(A) the product of the corporation’s ex-
cludable dividend amount for such calendar 
year and the fraction the numerator of which is 
the highest rate of tax specified in section 11 
(within the meaning of section 281(c)(4)) and
the denominator of which is 1 minus such high-
est rate, or 
‘‘(B) the amount specified by the corpora-
tion for purposes of this paragraph. 
‘‘(b) ADJUSTMENTS
TO EXCLUDABLE DIVIDEND 
AMOUNTS RESULTING FROM CREDITS AND REFUNDS.—
If subsection (a) applies to any credit or refund which is 
allowed or made in a calendar year—
‘‘(1) the applicable income taxes described in 
subsection (a)(1) otherwise taken into account under 
section 281 for determining the excludable dividend 
amount for the succeeding calendar year shall be re-
duced (but not below zero) by the amount of the 
credit or refund, and 
‘‘(2) the excludable dividend amount for the cal-
endar year shall be reduced by the excess of—
‘‘(A) the amount determined under sub-
section (a)(2) divided by the highest rate of tax 
specified in section 11, over 
‘‘(B) the amount determined under sub-
section (a)(2). 
‘‘(c) DISALLOWED
OVERPAYMENT
NOT
LOST.—
Nothing in subsection (a) shall be construed to reduce the 
amount of any overpayment for which credit or refund is 
not allowed by reason of subsection (a), and such overpay-
ment shall continue to be taken into account in applying 
subsection (a) for succeeding calendar years until a credit 
or refund is allowed or made. 
‘‘(d) EXCEPTION FOR FOREIGN TAX CREDIT.—This 
section shall not apply to any overpayment to the extent 
that such overpayment is attributable to the credit allowed 
under section 27(a). 
‘‘(e) DENIAL OF INTEREST.—No interest shall be al-
lowed on any overpayment during the period that credit 
or refund of such overpayment is not allowed by reason 
of this section. 
‘‘SEC. 285. SPECIAL RULES FOR FOREIGN CORPORATIONS 
AND SHAREHOLDERS. 
‘‘(a) COMPUTATION
OF
EXCLUDABLE
DIVIDEND 
AMOUNTS OF FOREIGN CORPORATIONS.—
‘‘(1) REDUCTION
IN
EXCLUDABLE
DIVIDEND 
AMOUNT
FOR
CERTAIN
TAXES.—The reduction 
under section 281(b)(1)(B) (without regard to this 
subparagraph) shall be increased by the sum of—
‘‘(A) the taxes imposed by section 884 (re-
lating to branch profits tax), and 
‘‘(B) so much of the taxes imposed by sec-
tion 881 as are attributable to dividends which 
would (but for subsection (b)) be excludable 
under section 116 or are attributable to dis-
tributions which are described in section 
283(a). 
‘‘(2) TREATMENT OF DISALLOWED EXCLUSIONS 
AND
ADJUSTMENTS.—Notwithstanding subsection 
(b)—
‘‘(A) the excludable dividend amount of a 
foreign corporation for a calendar year shall be 
increased by—
‘‘(i) the dividends received by the cor-
poration which (but for subsection (b)) 
would be excludable under section 116(a), 
and 
‘‘(ii) the distributions received by such 
corporation during such year which are de-
scribed in section 283(a), and 
‘‘(B) the earnings and profits of a foreign 
corporation—
‘‘(i) shall be increased by the amount 
described in subparagraph (A)(ii), and 
‘‘(ii) shall not be increased by any ex-
cess described in section 116(b) allocated 
to such corporation for which an increase 
in basis is not allowed by reason of sub-
section (b)(2).
‘‘(b) TAXATION OF FOREIGN SHAREHOLDERS.—In 
the case of a shareholder who is a nonresident alien indi-
vidual or a foreign corporation—
‘‘(1) no dividends shall be excludable under sec-
tion 116(a), 
‘‘(2) there shall be no increase in basis for any 
excess described in section 116(b) allocated to such 
individual or corporation under section 282, and 
‘‘(3) any distribution described in section 283 
shall be treated as a dividend for purposes of sec-
tions 871 and 881 and chapter 3. 
‘‘(c) RULES RELATING TO FOREIGN TAX CREDIT.—
‘‘(1) IN GENERAL.—No credit shall be allowed 
under section 901 for any taxes paid or accrued (or 
deemed paid under section 902 or 960) with respect 
to any dividend excludable under section 116 and 
any distribution described in section 283(a). 
‘‘(2) EXCLUDABLE
DIVIDEND
AMOUNT.—The 
excludable dividend amount of a corporation for any 
calendar year shall be determined without regard to 
a reduction in the credit allowed by section 27(a) on 
an applicable return for a prior calendar year. 
‘‘SEC. 286. OTHER SPECIAL RULES. 
‘‘(a) REDEMPTIONS.—If a corporation makes a dis-
tribution to a shareholder during any calendar year with
respect to its stock and section 301 does not apply to such 
distribution, the excludable dividend amount for the cal-
endar year, and the cumulative retained earnings basis ad-
justment amount as of the beginning of the calendar year 
in which the distribution is made, shall be reduced by the 
ratable share of such amounts attributable to the stock 
so redeemed. 
‘‘(b) COORDINATION WITH SECTION 246(C).—
‘‘(1) HOLDING PERIOD REQUIREMENTS.—If a 
shareholder disposes of any share of stock before the 
holding period requirements of section 246(c) are 
met—
‘‘(A) the basis of such share shall be re-
duced by the amount of dividends received with 
respect to such share which are excludable 
under section 116(a), and 
‘‘(B) there shall be no increase in basis for 
any excess described in section 116(b) allocated 
to the shareholder of such stock under section 
282. 
‘‘(2) RELATED PAYMENTS.—No deduction shall 
be allowed under this chapter for any related pay-
ments described in section 246(c)(1)(B) with respect 
to any dividend excludable under section 116(a) or 
basis increase under section 116(b) with respect to
any share of stock to the extent that such payments 
do not exceed the amount of such dividend or basis 
increase. 
‘‘(3) TREATMENT OF DISALLOWED EXCLUSIONS 
AND
ADJUSTMENTS.—The 
excludable 
dividend 
amount of any corporation for a calendar year, and 
its earnings and profits, shall not be increased by—
‘‘(A) the dividends received by the corpora-
tion which are excludable under section 116(a) 
and which resulted in a basis reduction under 
paragraph (1)(A), and 
‘‘(B) the aggregate increases in basis 
which (but for paragraph (1)(B)) would be 
made in stock held by the corporation. 
‘‘(c) TREATMENT OF REGULATED INVESTMENT COM-
PANIES AND REAL ESTATE INVESTMENT TRUSTS.—
‘‘(1) IN GENERAL.—Except as provided in regu-
lations, the excludable dividend amount of a regu-
lated investment company or real estate investment 
trust shall be zero. 
‘‘(2) CROSS REFERENCE.—
‘‘For special rules relating to application of this 
part to regulated investment companies and real es-
tate investment trusts, see section 852(g).
‘‘(d) EXCLUSION AND BASIS ALLOCATION REDUCED 
WHERE PORTFOLIO STOCK HELD BY CORPORATION IS 
DEBT-FINANCED.—
‘‘(1) 
TREATMENT
OF
EXCLUDABLE
DIVI-
DEND.—In the case of any debt-financed portfolio 
stock (within the meaning of section 246A), the 
amount excluded under section 116(a) with respect 
to any dividend received with respect to such stock 
shall be an amount equal to the product of—
‘‘(A) the amount which would be excluded 
under section 116(a) without regard to this 
paragraph, and 
‘‘(B) 100 percent minus the average in-
debtedness percentage (within the meaning of 
section 246A(d)). 
‘‘(2) TREATMENT OF BASIS INCREASE.—In the 
case of any debt-financed portfolio stock (within the 
meaning of section 246A) with respect to which 
there is an increase in basis under section 116(b) 
during any taxable year, the gross income of the tax-
payer shall be increased by an amount equal to the 
product of—
‘‘(A) the amount of the increase under sec-
tion 116(b), and 
‘‘(B) the average indebtedness percentage 
(within the meaning of section 246A(d)). 
‘‘(3) LIMITATION.—The aggregate amount of 
reductions under paragraph (1) and increases in
gross income under paragraph (2) with respect to 
any debt-financed portfolio stock shall not exceed the 
amount of interest deduction (including any deduct-
ible short sale expense) allocable to such stock. 
‘‘(4) TREATMENT OF INCREASE IN GROSS IN-
COME.—The excludable dividend amount of a cor-
poration for a calendar year shall not be increased 
by reason of any increase in gross income under 
paragraph (2). 
‘‘(5) EXCEPTION.—This subsection shall not 
apply to any dividend described in paragraph (1) or 
(2) of section 246A(b). 
‘‘(e) COOPERATIVES.—In the case of a cooperative to 
which subchapter T applies—
‘‘(1) the excludable dividend amount of such co-
operative shall be allocated for purposes of section 
116 and this part between shares of such coopera-
tive held by patrons and shares held by other per-
sons in such manner as the Secretary shall prescribe 
by regulations, and 
‘‘(2) no deduction shall be allowed to the coop-
erative under this chapter for any dividend paid to 
a patron which is excludable under section 116(a) or 
for any distribution described in section 283(a)
which reduced the basis of stock held by the cooper-
ative under section 301(c)(2). 
‘‘(f) ESOP STOCK.—Any dividend allowed as a de-
duction under section 404(k) shall not be treated as a divi-
dend for purposes of section 116 and this part, and any 
stock with respect to which such a dividend may be paid 
shall not be taken into account in making any allocation 
under 282 or any distribution described in section 283(a). 
‘‘SEC. 287. REGULATIONS. 
‘‘The Secretary shall prescribe such regulations as 
may be appropriate to carry out section 116 and this part, 
including regulations—
‘‘(1) providing for the treatment of options and 
convertible debt as stock, including modification of 
the attribution rules under section 318(a)(4), 
‘‘(2) providing for the allocation of the exclud-
able dividend amount and the cumulative retained 
earnings basis adjustment amount in the case of 
transactions described in section 312(h), 
‘‘(3) 
waiving 
the 
application 
of 
section 
246(c)(4) for purposes of sections 286(b) and 
1059(g), 
‘‘(4) modifying the consolidated return regula-
tions to the extent necessary or appropriate to apply 
the provisions of this part, including regulations that
accelerate the inclusion in the excludable dividend 
amount of a higher-tier member with respect to—
‘‘(A) activities of lower-tier members of the 
group, 
‘‘(B) dividends excludable under section 
116(a) received from such lower-tier members, 
and 
‘‘(C) increases in basis allocated under sec-
tion 282 to stock in such lower-tier members, 
‘‘(5) providing for the application of section 116 
and this part in the case of pass-thru entities, in-
cluding appropriate adjustments to basis, and 
‘‘(6) as are necessary to further the purposes of 
section 116 and this part and to prevent the cir-
cumvention of such purposes. 
Any regulations under paragraph (4) may be effective as 
of the effective date of this part.’’
(b) REPORTING OF EXCLUDABLE DIVIDENDS AND 
RETAINED EARNINGS BASIS ADJUSTMENTS.—
(1) IN GENERAL.—Section 6042(a) (relating to 
returns regarding payments of dividends and cor-
porate earnings and profits) is amended to read as 
follows: 
‘‘(a) REQUIREMENT OF REPORTING.—
‘‘(1) IN GENERAL.—Every person—
‘‘(A) who makes payments of dividends ag-
gregating $10 or more to any other person dur-
ing any calendar year, 
‘‘(B) who allocates under section 282 in-
creases in basis of stock in a corporation aggre-
gating $10 or more to any other person during 
any calendar year, 
‘‘(C) who makes distributions described in 
section 283(a) aggregating $10 or more to any 
other person during any calendar year, or 
‘‘(D) who receives such payments of divi-
dends, allocations of increases in basis, or dis-
tributions as a nominee and who makes pay-
ments or allocates increases aggregating $10 or 
more during any calendar year to any other 
person with respect to the dividends, alloca-
tions, or distributions received, 
shall make a return at the time and in the manner 
prescribed by the Secretary, setting forth the infor-
mation described in paragraph (3). 
‘‘(2) RETURNS
REQUIRED
BY
SECRETARY.—
Every person who makes payments of dividends, al-
locations under section 282, or distributions de-
scribed in section 283(a) to which paragraph (1) 
does not apply shall, when required by the Secretary,
make a return setting forth the information de-
scribed in paragraph (3). 
‘‘(3) INFORMATION
REPORTED.—Information 
described in this paragraph includes—
‘‘(A) the aggregate amount of dividends, 
including the portion of such amount excludable 
from gross income under section 116(a), 
‘‘(B) the amount of each allocation of basis 
under section 282 with respect to each share of 
stock and the date of such increase, 
‘‘(C) the amount of each distribution de-
scribed in section 283(a), including the portion 
of such amount to which paragraph (2) or (3) 
of section 301(c) applies and the date of such 
distribution, and 
‘‘(D) such other information as the Sec-
retary may require. 
In the case of a nominee described in paragraph 
(1)(D), this paragraph shall apply with respect to 
the payments and allocations made by the nominee.’’ 
(2) APPLICATION TO FOREIGN PERSONS.—Sec-
tion 6042 is amended by adding at the end the fol-
lowing new subsection: 
‘‘(e) APPLICATION TO FOREIGN PERSONS.—The Sec-
retary may provide for the application of this section to
payments, allocations, and distributions made by or to a 
foreign person to the extent necessary to carry out the 
provisions of section 116 and part X of subchapter B of 
chapter 1.’’
(3) CONFORMING AMENDMENTS.—
(A) Section 6042(b)(3) is amended by 
striking ‘‘or (B)’’ and inserting ‘‘or (D)’’. 
(B) Section 6042(c)(2) is amended to read 
as follows: 
‘‘(2) the information described in subsection 
(a)(3) required to be shown on the return.’’
(c) AMENDMENTS TO OTHER SECTIONS.—
(1) MINIMUM
TAX.—Clause (i) of section 
56(g)(4)(B) is amended by striking ‘‘or under sec-
tion 114’’ and inserting ‘‘, section 114, or section 
116’’. 
(2) COORDINATION WITH DIVIDEND RECEIVED 
DEDUCTIONS.—
(A) Section 246 is amended by adding at 
the end the following new subsection: 
‘‘(f) COORDINATION WITH DIVIDEND EXCLUSION.—
No deduction shall be allowed under section 243, 244, or 
245 with respect to the amount of any dividend excluded 
from gross income under section 116 or would be so ex-
cluded but for sections 285(b)(1) and 286(d).’’
(B) Section 243 is amended by adding at 
the end the following new subsection: 
‘‘(f) TERMINATION.—Paragraph (1) of subsection (a) 
shall not apply to any dividend—
‘‘(1) paid from earnings and profits accumu-
lated in taxable years ending after April 1, 2001, 
‘‘(2) made with respect to stock issued after 
February 2, 2003, or 
‘‘(3) received by a corporation after December 
31, 2005.’’
(3) CARRYOVERS IN CERTAIN CORPORATION AC-
QUISITIONS.—Section 381(c) is amended by adding 
at the end the following new paragraph: 
‘‘(27) EDA AND CREBAA.—The acquiring cor-
poration shall take into account (to the extent prop-
er to carry out the purposes of this section, section 
116, and part X of subchapter B, and under such 
regulation as may be prescribed by the Secretary) 
the excludable dividend amount and the cumulative 
retained earnings basis adjustment amount in re-
spect of the distributor or transferor.’’
(4) TRUSTS AND ESTATES.—Subsection (a) of 
section 643 is amended—
(A) by redesignating paragraph (7) as 
paragraph (8) and by inserting after paragraph 
(6) the following new paragraph: 
‘‘(7) DIVIDENDS, ETC.—There shall be included 
the amount of any dividends excluded from gross in-
come under section 116 and the amount of any dis-
tribution described in section 283.’’, and 
(B) by striking ‘‘and (6)’’ in the last sen-
tence and inserting ‘‘, (6), and (7)’’. 
(5) PARTNERSHIPS.—
(A) Paragraph (5) of section 702(a) is 
amended to read as follows: 
‘‘(5) dividends with respect to which there is an 
exclusion under section 116 or a deduction under 
part VIII of subchapter B,’’. 
(B) Section 705(a)(1) is amended by strik-
ing ‘‘and’’ at the end of subparagraph (B), by 
striking the semicolon at the end of subpara-
graph (C) and inserting ‘‘, and’’, and by adding 
at the end the following new subparagraph: 
‘‘(D) increases in basis under section 
116(b) allocated to the partnership;’’. 
(6) EXTRAORDINARY DIVIDENDS.—
(A) IN GENERAL.—Section 1059 is amend-
ed by redesignating subsection (g) as subsection
(h) and by inserting after subsection (f) the fol-
lowing new subsection: 
‘‘(g) TREATMENT OF EXCLUDABLE DIVIDENDS AND 
RETAINED EARNINGS BASIS ADJUSTMENTS AS EXTRAOR-
DINARY DIVIDENDS.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, any dividend excludable under section 116(a) 
or increase in basis under section 116(b) shall be 
treated as an extraordinary dividend, except that 
this section shall be applied by substituting ‘1 year 
(or such other period as the Secretary may pre-
scribe)’ for ‘2 years’ each place it appears. 
‘‘(2) TREATMENT OF DEEMED EXTRAORDINARY 
DIVIDENDS.—The excludable dividend amount of 
any corporation for a calendar year, and its earnings 
and profits, shall not be increased by—
‘‘(A) the dividends received by the corpora-
tion which are treated as extraordinary divi-
dends by reason of paragraph (1), and 
‘‘(B) the aggregate increases in basis 
under section 116(b) which are so treated. 
‘‘(3) REGULATIONS.—The Secretary may by 
regulation provide for exceptions to the application 
of paragraph (1).’’
(B) Paragraph (3) of section 1059(d) is 
amended by inserting ‘‘section 1223(11) shall 
not apply and’’ after ‘‘subsection (a),’’. 
(C)(i) Section 1059 is amended by striking 
‘‘corporation’’ each place it appears in sub-
section (a) and inserting ‘‘taxpayer’’. 
(ii) The section heading for section 1059 is 
amended by striking ‘‘CORPORATE’’ and by in-
serting ‘‘AND
EXCLUDABLE’’ before ‘‘DIVI-
DENDS’’. 
(iii) The item relating to section 1059 in 
the table of sections for part IV of subchapter 
O of chapter 1 is amended by striking ‘‘cor-
porate’’ and by inserting ‘‘and excludable’’ be-
fore ‘‘dividends’’. 
(7) PRIVATE FOUNDATIONS.—Section 4940(c) 
is amended by adding at the end the following new 
paragraph: 
‘‘(6) COORDINATION
WITH
DIVIDEND
EXCLU-
SION.—For purposes of this section, gross invest-
ment income shall not include—
‘‘(A) a dividend to the extent excluded 
from gross income under section 116(a), and 
‘‘(B) a distribution described in section 
283.’’
(d) CONFORMING AMENDMENTS.—
(1)(A) Part X of subchapter B of chapter 1, as 
in effect on the day before the date of the enactment 
of this Act, is hereby moved after part XI of such 
subchapter B and redesignated as part XII. 
(B) Section 281, as so in effect, is redesignated 
as section 296. 
(C) The table of sections for such part XII, as 
so designated, is amended by striking ‘‘Sec. 281’’ 
and inserting ‘‘Sec. 296.’’
(D) The table of parts for subchapter B of 
chapter 1 is amended by striking the items relating 
to parts X and XI and inserting the following new 
items:
‘‘Part X. Rules for application of dividend exclusion and retained 
earnings basis adjustments. 
‘‘Part XI. Special rules relating to corporate preference items. 
‘‘Part XII. Terminal railroad corporations and their share-
holders.’’
(2) Subsection (f) of section 301 is amended by 
adding at the end the following new paragraph: 
‘‘(4) For exclusion from gross income of certain 
dividends, see section 116.’’
SEC. 203. TREATMENT OF REGULATED INVESTMENT COM-
PANIES 
AND 
REAL 
ESTATE 
INVESTMENT 
TRUSTS. 
(a) IN GENERAL.—Section 852 is amended by adding 
at the end the following new subsection:
‘‘(g) SPECIAL RULES RELATING TO SECTION 116 
AND PART X OF SUBCHAPTER B.—
‘‘(1) EXCLUDABLE PORTION.—
‘‘(A) IN GENERAL.—For purposes of sec-
tion 116(a), the excludable portion of any divi-
dend paid by any qualified investment entity 
shall be the amount so designated by such enti-
ty in a written notice mailed to its shareholders 
not later than 60 days after the close of its tax-
able year in which such dividend is paid. 
‘‘(B) 
LIMITATION.—If 
the 
aggregate 
amount so designated with respect to a taxable 
year (including dividends paid after the close of 
the taxable year as described in section 855) ex-
ceeds the aggregate amount of dividends re-
ceived by such entity during such year which 
are excludable from gross income under section 
116(a), then the amount of a dividend other-
wise excludable by reason of a designation 
under subparagraph (A) shall be reduced by an 
amount which bears the same ratio to the 
amount otherwise excludable as such excess 
bears to the total amount designated under sub-
paragraph (A).
‘‘(C) TREATMENT OF CAPITAL GAIN AND 
EXEMPT-INTEREST
DIVIDENDS.—Any amount 
designated under subparagraph (A) as exclud-
able under section 116 may not be treated as 
a capital gain dividend or an exempt-interest 
dividend. 
‘‘(D) COORDINATION WITH SECTION 853.—
The election under section 853 shall not apply 
to dividends excludable under section 116 and 
distributions described in section 283(a) re-
ceived by a qualified investment entity. 
‘‘(2) RETAINED
EARNINGS
BASIS
ADJUST-
MENTS.—
‘‘(A) IN GENERAL.—A qualified investment 
entity may allocate any increase in basis allo-
cated to the entity under section 282 to shares 
of stock in the entity at 1 or more times during 
the taxable year in the manner and the time 
prescribed in paragraphs (2) and (3) of section 
282(b). 
‘‘(B) DESIGNATION.—For purposes of sec-
tion 116(b), the increase in basis allocated to 
any share of stock in the entity shall be the 
amount so designated by such entity in a writ-
ten notice mailed to its shareholders not later
than 60 days after the close of its taxable year 
in which such allocation is made. 
‘‘(C) LIMITATION.—Rules similar to the 
rules of paragraph (1)(B) shall apply to 
amounts allocated under this paragraph. 
‘‘(D) 
SHAREHOLDER
TREATMENT
OF 
AMOUNTS DESIGNATED.—Shareholders of such 
entity who receive an allocation under this 
paragraph from such entity shall take into ac-
count such allocation as if it were an allocation 
under section 282. 
‘‘(E) EARNINGS AND PROFITS.—Earnings 
and profits of the entity making such an alloca-
tion shall be adjusted in the same manner as 
provided in section 282(c). 
‘‘(3) CERTAIN DISTRIBUTIONS AFTER PREVIOUS 
RETAINED EARNINGS BASIS ADJUSTMENTS.—
‘‘(A) IN
GENERAL.—If any qualified in-
vestment entity receives during any taxable year 
distributions described in section 283(a) which 
reduced the basis of stock held by such entity 
under section 301(c)(2), the entity may des-
ignate any distributions described in section 
301(a) made by such entity in such taxable 
year which are not excludable under section
116(a) (after the application of paragraph (1)) 
as distributions described in section 283(a). 
Such designations shall be made in a written 
notice mailed to its shareholders not later than 
60 days after the close of its taxable year in 
which such distribution is made. 
‘‘(B) 
LIMITATION.—If 
the 
aggregate 
amount so designated with respect to a taxable 
year (including distributions paid after the close 
of the taxable year as provided in section 
855(e)) exceeds the aggregate distributions de-
scribed in section 283(a) which reduced the 
basis of stock held by such entity under section 
301(c)(2) for such taxable year, then the 
amount of a distribution otherwise treated as a 
distribution described in section 283(a) by rea-
son of a designation under subparagraph (A) 
shall be reduced by an amount which bears the 
same ratio to the amount otherwise so treated 
as such excess bears to the total amount des-
ignated under subparagraph (A). 
‘‘(C) 
SHAREHOLDER
TREATMENT
OF 
AMOUNTS DESIGNATED.—Shareholders of such 
entity who receive a distribution from such enti-
ty which is designated under this paragraph
shall treat such distribution as a distribution 
described in section 283(a). 
‘‘(D) TREATMENT OF CAPITAL GAIN AND 
EXEMPT-INTEREST
DIVIDENDS.—Any distribu-
tion designated under subparagraph (A) may 
not be treated as a capital gain dividend or an 
exempt-interest dividend. 
‘‘(E) ADJUSTMENTS.—No adjustment shall 
be made in the earnings and profits of a quali-
fied investment entity with respect to a dis-
tribution by such entity which is designated 
under subparagraph (A). 
‘‘(4) COORDINATION WITH DIVIDENDS PAID DE-
DUCTION.—No allocation or distribution designated 
under paragraph (2) or (3) shall be treated as a div-
idend for purposes of section 561. 
‘‘(5) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) QUALIFIED INVESTMENT ENTITY.—
The term ‘qualified investment entity’ means—
‘‘(i) a regulated investment company, 
and 
‘‘(ii) a real estate investment trust.
‘‘(B) EXEMPT-INTEREST DIVIDEND.—The 
term ‘exempt-interest dividend’ has the mean-
ing given to such term by subsection (b)(5).’’
(b) OTHER RULES RELATING TO REGULATED IN-
VESTMENT COMPANIES.—
(1) DISTRIBUTION REQUIREMENTS.—
(A) Clause (i) of section 852(a)(1)(B) is 
amended by inserting ‘‘and its dividend income 
excludable 
under 
section 
116(a),’’ 
before 
‘‘over’’. 
(B) Section 852(a) is amended by striking 
‘‘and’’ at the end of paragraph (1), by redesig-
nating paragraph (2) as paragraph (3), and by 
inserting after paragraph (1) the following new 
paragraph: 
‘‘(2) 90 percent of the distributions described in 
section 283(a)—
‘‘(A) which are received by such company 
during the taxable year, and 
‘‘(B) which reduce under section 301(c)(2) 
the basis of stock held by such company, 
are distributed during such year under subsection 
(g)(3)(A), and’’. 
(C) Section 855 is amended by adding at 
the end the following new subsection:
‘‘(e) DISTRIBUTION
OF
PREVIOUSLY
RETAINED 
EARNINGS BASIS ADJUSTMENTS.—Rules similar to the 
rules of the preceding provisions of this section shall apply 
to distributions described in section 852(g)(3)(A).’’
(2) 
TAXATION
OF
ENTITY
AND
SHARE-
HOLDERS.—
(A) The material following paragraph (3) 
of section 851(b) is amended—
(i) by inserting ‘‘, dividends excludable 
from gross income under section 116(a), 
and distributions described in section 
283(a) which reduce the basis of stock 
under section 301(c)(2)’’ after ‘‘103(a)’’ in 
the third sentence, and 
(ii) by adding at the end the following 
new sentence: ‘‘For purposes of paragraph 
(2), distributions described in section 
283(a) which reduce the basis of stock 
under section 301(c)(2) shall be treated as 
dividends.’’
(B) Section 852(b)(2)(D) is amended by 
striking ‘‘and exempt-interest dividends’’ and 
inserting ‘‘, exempt-interest dividends, and any 
dividends excludable under section 116(a)’’.
(C) Subparagraph (B) of section 852(b)(4) 
is amended to read as follows: 
‘‘(B) LOSS
ATTRIBUTABLE
TO
EXEMPT 
DIVIDENDS.—If—
‘‘(i) a shareholder of a regulated in-
vestment company receives an exempt-in-
terest dividend, a dividend excludable 
under section 116(a), or an allocation 
under subsection (g)(2), with respect to 
any share, and 
‘‘(ii) such share is held by the tax-
payer for 6 months or less, 
then any loss on the sale or exchange of such 
share shall, to the extent of the sum of the 
amounts of such dividends and allocations, be 
disallowed.’’
(D) Paragraph (3) of section 4982(c) is 
amended by striking ‘‘and’’ at the end of sub-
paragraph (A), by striking the period at the 
end of subparagraph (B) and inserting ‘‘, and’’, 
and by adding at the end the following new sub-
paragraph: 
‘‘(C) any dividend excludable from gross 
income under section 116(a).’’
(c) OTHER RULES RELATING TO REAL ESTATE IN-
VESTMENT TRUSTS.—
(1) DISTRIBUTION REQUIREMENTS.—
(A) Subparagraph (A) of section 857(a)(1) 
is amended by striking ‘‘and’’ at the end of 
clause (i), by striking ‘‘minus’’ at the end of 
clause (ii), and by inserting at the end the fol-
lowing new clause: 
‘‘(iii) 90 percent of its dividend in-
come excludable under section 116(a); 
minus’’
(B) Subsection (a) of section 857 is 
amended by redesignating paragraph (2) as 
paragraph (3) and by inserting after paragraph 
(1) the following new paragraph: 
‘‘(2) 90 percent of the distributions described in 
section 283(a)—
‘‘(A) which are received by such trust dur-
ing the taxable year, and 
‘‘(B) which reduce under section 301(c)(2) 
the basis of stock held by such trust, 
are distributed during such year under subsection 
(g)(3)(A); and’’. 
(C) Section 858 is amended by adding at 
the end the following new subsection:
‘‘(d) DISTRIBUTION
OF
PREVIOUSLY
RETAINED 
EARNINGS BASIS ADJUSTMENTS.—Rules similar to the 
rules of the preceding provisions of this section shall apply 
to distributions described in section 852(g)(3).’’
(2) 
TAXATION
OF
ENTITY
AND
SHARE-
HOLDERS.—
(A)(i) Section 856(c)(2) is amended—
(I) by inserting ‘‘(including dividends 
excludable from gross income under section 
116(a)) and distributions described in sec-
tion 283(a) which reduce the basis of stock 
under section 301(c)(2)’’ after ‘‘dividends’’ 
in subparagraph (A), and 
(II) by inserting ‘‘(including tax-ex-
empt interest)’’ after ‘‘interest’’ in sub-
paragraph (B). 
(ii) Section 856(c) is amended by adding 
at the end the following new paragraph: 
‘‘(8) GROSS INCOME TESTS.—For purposes of 
paragraphs (2) and (3), gross income shall be treat-
ed as including tax-exempt interest, dividends ex-
cludable from gross income under section 116(a), 
and distributions described in section 283(a) which 
reduce the basis of stock under section 301(c)(2).’’
(B) Section 857(b)(2)(B) is amended by 
inserting ‘‘ or any dividends paid which are ex-
cludable under section 116(a)’’ after ‘‘subpara-
graph (D)’’. 
(C) Section 857(b) is amended by adding 
at the end the following new paragraph: 
‘‘(10) LOSS ATTRIBUTABLE TO EXEMPT DIVI-
DENDS.—If—
‘‘(A) a shareholder of a real estate invest-
ment trust receives a dividend excludable under 
section 116(a) or an allocation under section 
852(g)(2) with respect to any share, and 
‘‘(B) such share is held by the taxpayer for 
6 months or less, 
then any loss on the sale or exchange of such share 
shall, to the extent of the sum of the amounts of 
such dividends and allocations, be disallowed.’’
(D) Subsection (g) of section 857 is 
amended to read as follows: 
‘‘(g) CROSS REFERENCES.—
‘‘(1) For provisions relating to excise tax based 
on certain real estate investment trust taxable in-
come not distributed during the taxable year, see 
section 4981.
‘‘(2) For special rules relating to application of 
dividend exclusion and retained earnings basis ad-
justments, see section 852(g).’’
(E) Paragraph (1) of section 4981(c) is 
amended by striking ‘‘and’’ at the end of sub-
paragraph (A), by striking the period at the 
end of subparagraph (B) and inserting ‘‘, and’’, 
and by adding at the end the following new sub-
paragraph: 
‘‘(C) any dividend excludable from gross 
income under section 116(a).’’
SEC. 204. TREATMENT OF INSURANCE COMPANIES. 
(a) LIFE INSURANCE COMPANIES.—
(1) Section 803 is amended by adding at the 
end the following new subsection: 
‘‘(c) SPECIAL RULES FOR EXCLUDABLE DIVIDENDS 
AND RETAINED EARNINGS BASIS ADJUSTMENTS.—
‘‘(1) IN GENERAL.—The exclusion under sec-
tion 116(a) with respect to any dividend received by 
a life insurance company shall only apply to such 
company’s share (as determined under section 812) 
of such dividend. 
‘‘(2) RETAINED
EARNINGS
BASIS
ADJUST-
MENTS.—In the case of any increase in basis under
section 116(b) allocated under section 282 to stock 
held by a life insurance company—
‘‘(A) the life insurance company’s and pol-
icyholders’ shares of such allocation shall be de-
termined in accordance with section 812 in the 
same manner as if it were a dividend, and 
‘‘(B) life insurance company gross income 
of such company shall be increased by the pol-
icyholders’ share of such allocation. 
‘‘(3) RULES
FOR
SEGREGATED
ASSET
AC-
COUNTS.—In the case of stock held in a segregated 
asset account (within the meaning of section 817), 
this subsection shall be applied as if the policy-
holders’ share of the excludable portion of any divi-
dend, or any increase in basis under section 116(b), 
with respect to such stock were 100 percent. 
‘‘(4) COMPUTATION OF EXCLUDABLE DIVIDEND 
AMOUNT.—In the case of a life insurance company, 
the increase under clause (ii) or (iii) of section 
281(b)(1)(A) in the company’s excludable dividend 
amount shall be limited to the company’s share (as 
determined under section 812) of the dividends or 
increases in basis described in either such clause.’’
(2) Section 812(d)(1)(A) is amended by insert-
ing ‘‘(including dividends excludable under section 
116(a))’’ after ‘‘dividends’’. 
(3) Section 815(c)(2)(A)(iii) is amended by 
adding ‘‘,the amount of dividends excludable under 
section 116(a) (as modified by section 803(c)(1)), 
and the amount of basis increase under section 
116(b) (as modified by section 803(c)(2))’’ after 
‘‘section 103’’. 
(b) OTHER INSURANCE COMPANIES.—
(1) Section 832(b)(5)(B) is amended by strik-
ing ‘‘and’’ at the end of clause (ii), by striking the 
period at the end of clause (iii) and inserting ‘‘, 
and’’, and by adding after clause (iii) the following 
new clause: 
‘‘(iv) any dividend excludable under 
section 116(a) which is received during 
such taxable year and any increase in basis 
under section 116(b) which is allocated 
under section 282 to such company during 
such taxable year.’’
(2) Section 832(c) is amended by striking 
‘‘and’’ at the end of paragraph (12), by striking the 
period at the end of paragraph (13) and inserting ‘‘;
and’’, and by adding at the end the following new 
paragraph: 
‘‘(14) the amount of dividends received during 
the taxable year which are excluded from gross in-
come under section 116(a).’’
(3) Section 833(b)(3)(E) is amended—
(A) by striking ‘‘and’’ at the end of clause 
(i), by striking the period at the end of clause 
(ii) and inserting ‘‘, and’’, and by inserting 
after clause (ii) the following new clause: 
‘‘(iii) the aggregate amount excluded 
for 
the 
taxable 
year 
under 
section 
116(a).’’, and 
(B) by adding at the end the following: 
‘‘The amount determined under clause (iii) 
shall be reduced by the amount of any decrease 
in such deductions for the taxable year by rea-
son of section 832(b)(5)(B) to the extent such 
decrease is attributable to the exclusion under 
section 116(a).’’
(4) Section 834(c) is amended by adding at the 
end the following new paragraph: 
‘‘(10) EXCLUDABLE DIVIDENDS.—The amount 
of dividends received during the taxable year which
are excluded from gross income under section 
116(a).’’
SEC. 205. TREATMENT OF S CORPORATIONS. 
(a) BASIS
ADJUSTMENTS
RELATING
TO
DIVI-
DENDS.—Section 1367(a)(1) is amended by striking 
‘‘and’’ at the end of subparagraph (B), by striking the 
period at the end of subparagraph (C) and inserting ‘‘, 
and’’, and by adding at the end the following new subpara-
graph: 
‘‘(D) increases in basis under section 
116(b) allocated to the S corporation.’’. 
(b) APPLICATION OF SECTION 116 AND PART X OF 
SUBCHAPTER B TO S CORPORATIONS.—Section 1368 is 
amended by adding at the end the following new sub-
section: 
‘‘(f) COORDINATION
WITH DIVIDEND EXCLUSION 
AND RETAINED EARNINGS BASIS ADJUSTMENTS.—
‘‘(1) DETERMINATION
OF
EXCLUDED
DIVI-
DENDS AMOUNT.—
‘‘(A) IN GENERAL.—Clauses (ii) and (iii) 
of section 281(b)(1)(A) shall not apply to 
amounts received or allocated in a taxable year 
for which the corporation is an S corporation.
‘‘(B) CROSS REFERENCE.—
‘‘For treatment of taxes imposed by section 1374, 
see section 281(d)(1).
‘‘(2) DISTRIBUTIONS.—Subject to regulations 
prescribed by the Secretary, the preceding provisions 
of this section shall not apply to any dividend ex-
cludable from gross income under section 116(a) 
and any distribution described in section 283(a).’’
(c) MODIFICATION
TO TREATMENT
OF SECTION 
1374 TAX.—
(1) Paragraph (2) of section 1366(f) is amend-
ed to read as follows: 
‘‘(2) TREATMENT OF TAX IMPOSED ON BUILT-
IN GAINS.—The amount of the items of the net rec-
ognized built-in-gain taken into account under sec-
tion 1374(b)(1) (reduced by any deduction allowed 
under section 1374(b)(2)) shall not be taken into ac-
count under this section.’’
(2)(A) Subsection (c) of section 1371 is amend-
ed by adding at the end the following new para-
graph: 
‘‘(B) EARNINGS AND PROFITS.—The accu-
mulated earnings and profits of the corporation 
shall be increased at the beginning of the tax-
able year by the amount not taken into account 
under section 1366 by reason of section
1366(f)(2) (determined without regard any re-
duction 
of 
such 
amount 
under 
section 
1374(b)(2)) reduced by the tax imposed by sec-
tion 1374 (net of credits allowed).’’
(B) Paragraph (1) of section 1371(c) is amend-
ed by striking ‘‘and (3)’’ and inserting ‘‘, (3), and 
(4)’’. 
(d) REPEAL OF TAX AND TERMINATION WHERE EX-
CESS PASSIVE INVESTMENT INCOME.—
(1) REPEAL OF TAX.—
(A) IN
GENERAL.—Section 1375 is re-
pealed. 
(B) 
CONFORMING
AMENDMENTS.—Sec-
tions 26(b)(2)(J) and 1366(f)(3) are repealed. 
(2) 
REPEAL
OF
TERMINATION.—Section 
1362(d) is amended by striking paragraph (3).
SEC. 206. REPEAL OF ACCUMULATED EARNINGS TAX AND 
PERSONAL HOLDING COMPANY TAX. 
(a) IN GENERAL.—Parts I and II of subchapter G 
of chapter 1 (relating to corporations improperly accumu-
lating surplus and to personal holding companies) are 
hereby repealed. 
(b) CONFORMING AMENDMENTS.—
(1) Section 12 is amended by striking para-
graph (2) and by redesignating paragraphs (3), (4),
(5), (6), and (7) as paragraphs (2), (3), (4), (5), 
and (6), respectively. 
(2) Section 26(b)(2) is amended by striking 
subparagraphs (F) and (G). 
(3) Section 30A(c) is amended by inserting 
‘‘or’’ at the end of paragraph (1), by striking para-
graphs (2) and (3), and by redesignating paragraph 
(4) as paragraph (2). 
(4) Section 41(e)(7)(E) is amended by adding 
‘‘and’’ at the end of clause (i), by striking clause 
(ii), and by redesignating clause (iii) as clause (ii). 
(5) Section 56(b)(2) is amended by striking 
subparagraph (C) and by redesignating subpara-
graph (D) as subparagraph (C). 
(6) Section 111 is amended by striking sub-
section (d). 
(7) Section 170(e)(4)(D) is amended by adding 
‘‘and’’ at the end of clause (i), by striking clause 
(ii), and by redesignating clause (iii) as clause (ii). 
(8) Sections 170(f)(10)(A), 508(d), 4947, and 
4948(c)(4) 
are 
each 
amended 
by 
striking 
‘‘545(b)(2),’’ each place it appears. 
(9)(A) Section 316(b) is amended by striking 
paragraph (2) and by redesignating paragraph (3) 
as paragraph (2).
(B) Section 331(b) is amended by striking 
‘‘(other than a distribution referred to in paragraph 
(2)(B) of section 316(b))’’. 
(10) Section 341(d) is amended—
(A) by striking ‘‘section 544(a) (relating to 
personal holding companies)’’ and inserting 
‘‘section 465(f) (relating to constructive owner-
ship rules)’’, and 
(B) by inserting before the period at the 
end of the next to the last sentence ‘‘and such 
paragraph (2) shall be applied by inserting ‘or 
by or for his partner’ after ‘his family’ ’’. 
(11) Section 381(c) is amended by striking 
paragraphs (14) and (17). 
(12) Section 443(e) is amended by striking 
paragraphs (1) and (2) and by redesignating para-
graphs (3), (4), and (5) as paragraphs (1), (2), and 
(3), respectively. 
(13) Section 447(g)(4)(A) is amended by strik-
ing ‘‘other than—’’ and all that follows and insert-
ing ‘‘other than an S corporation.’’
(14)(A) Section 465(a)(1)(B) is amended to 
read as follows: 
‘‘(B) a C corporation which is closely 
held,’’.
(B) Section 465(a)(3) is amended to read as 
follows:
‘‘(3) CLOSELY
HELD
DETERMINATION.—For 
purposes of paragraph (1), a corporation is closely 
held if, at any time during the last half of the tax-
able year, more than 50 percent in value of its out-
standing stock is owned, directly or indirectly, by or 
for not more than 5 individuals. For purposes of this 
paragraph, an organization described in section 
401(a), 501(c)(17), or 509(a) or a portion of a trust 
permanently set aside or to be used exclusively for 
the purposes described in section 642(c) shall be 
considered an individual.’’
(C) Section 465(c)(7)(B) is amended by strik-
ing clause (i) and by redesignating clauses (ii) and 
(iii) as clauses (i) and (ii), respectively. 
(D) Section 465(c)(7)(G) is amended to read as 
follows: 
‘‘(G) LOSS OF 1 MEMBER OF AFFILIATED 
GROUP MAY NOT OFFSET INCOME OF PERSONAL 
SERVICE CORPORATION.—Nothing in this para-
graph shall permit any loss of a member of an 
affiliated group to be used as an offset against 
the income of any other member of such group 
which is a personal service corporation (as de-
fined in section 269A(b) but determined by sub-
stituting ‘5 percent’ for ‘10 percent’ in section 
269A(b)(2)).’’
(E) Section 465 is amended by adding at the 
end the following new subsection: 
‘‘(f) CONSTRUCTIVE OWNERSHIP RULES.—For pur-
poses of subsection (a)(3)—
‘‘(1) STOCK
NOT
OWNED
BY
INDIVIDUAL.—
Stock owned, directly or indirectly, by or for a cor-
poration, partnership, estate, or trust shall be con-
sidered as being owned proportionately by its share-
holders, partners, or beneficiaries. 
‘‘(2) FAMILY OWNERSHIP.—An individual shall 
be considered as owning the stock owned, directly or 
indirectly, by or for his family. For purposes of this 
paragraph, the family of an individual includes only 
his brothers and sisters (whether by the whole or 
half blood), spouse, ancestors, and lineal descend-
ants. 
‘‘(3) OPTIONS.—If any person has an option to 
acquire stock, such stock shall be considered as 
owned by such person. For purposes of this para-
graph, an option to acquire such an option, and each 
one of a series of such options, shall be considered 
as an option to acquire such stock.
‘‘(4) APPLICATION
OF
FAMILY
AND
OPTION 
RULES.—Paragraphs (2) and (3) shall be applied if, 
but only if, the effect is to make the corporation 
closely held under subsection (a)(3). 
‘‘(5) CONSTRUCTIVE
OWNERSHIP
AS
ACTUAL 
OWNERSHIP.—Stock constructively owned by a per-
son by reason of the application of paragraph (1) or 
(3), shall, for purposes of applying paragraph (1) or 
(2), be treated as actually owned by such person; 
but stock constructively owned by an individual by 
reason of the application of paragraph (2) shall not 
be treated as owned by him for purposes of again 
applying such paragraph in order to make another 
the constructive owner of such stock. 
‘‘(6) OPTION
RULE
IN
LIEU
OF
FAMILY 
RULE.—If stock may be considered as owned by an 
individual under either paragraph (2) or (3) it shall 
be considered as owned by him under paragraph (3). 
‘‘(7) CONVERTIBLE SECURITIES.—Outstanding 
securities convertible into stock (whether or not con-
vertible during the taxable year) shall be considered 
as outstanding stock if the effect of the inclusion of 
all such securities is to make the corporation closely 
held under subsection (a)(3). The requirement under 
the preceding sentence that all convertible securities
must be included if any are to be included shall be 
subject to the exception that, where some of the out-
standing securities are convertible only after a later 
date than in the case of others, the class having the 
earlier conversion date may be included although the 
others are not included, but no convertible securities 
shall be included unless all outstanding securities 
having a prior conversion date are also included.’’
(15)(A) Section 553(a)(1) is amended by strik-
ing ‘‘section 543(d)’’ and inserting ‘‘subsection (c)’’. 
(B) Section 553 is amended by adding at the 
end the following new subsection:
‘‘(c) ACTIVE BUSINESS COMPUTER SOFTWARE ROY-
ALTIES.—
‘‘(1) IN GENERAL.—For purposes of subsection 
(a), the term ‘active business computer software roy-
alties’ means any royalties—
‘‘(A) received by any corporation during 
the taxable year in connection with the licensing 
of computer software, and 
‘‘(B) with respect to which the require-
ments of paragraphs (2), (3), and (4) are met. 
‘‘(2) ROYALTIES MUST BE RECEIVED BY COR-
PORATION ACTIVELY ENGAGED IN COMPUTER SOFT-
WARE BUSINESS.—The requirements of this para-
(B) subsections (a) and (b) of section 563 
of such Code (as so in effect) shall continue to 
apply to dividends relating to taxable years be-
ginning before January 1, 2003. 
Notwithstanding subparagraphs (A) and (B), such 
dividends shall not be taken into account in applying 
section 116 of such Code or part X of subchapter 
B of chapter 1 of such Code.
Æ