amended by inserting after section 115 the following new
section:
‘‘SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS AND INTER-
EST RECEIVED BY INDIVIDUALS.
‘‘(a) EXCLUSION FROM GROSS INCOME.—Gross in-
come does not include the sum of the amounts received
during the taxable year by an individual as—
‘‘(1) dividends from domestic corporations, or
‘‘(2) interest.
‘‘(b) LIMITATIONS.—
‘‘(1) 
MAXIMUM
AMOUNT.—The 
aggregate
amount excluded under subsection (a) for any tax-
able year shall not exceed $5,000 ($10,000 in the
case of a joint return).
‘‘(2) CERTAIN
DIVIDENDS
EXCLUDED.—Sub-
section (a)(1) shall not apply to any dividend from
a corporation which, for the taxable year of the cor-
poration in which the distribution is made, or for the
next preceding taxable year of the corporation, is a
corporation exempt from tax under section 501 (re-
lating to certain charitable, etc., organization) or
section 521 (relating to farmers’ cooperative associa-
tions).
‘‘(c) SPECIAL RULES.—For purposes of this sec-
tion—
‘‘(1) DISTRIBUTIONS
FROM
REGULATED
IN-
VESTMENT COMPANIES AND REAL ESTATE INVEST-
MENT TRUSTS.—Subsection (a) shall apply with re-
spect to distributions by—
‘‘(A) regulated investment companies to
the extent provided in section 854(c), and
‘‘(B) real estate investment trusts to the
extent provided in section 857(c).
‘‘(2) DISTRIBUTIONS BY A TRUST.—For pur-
poses of subsection (a), the amount of dividends and
interest properly allocable to a beneficiary under sec-
tion 652 or 662 shall be deemed to have been re-
ceived by the beneficiary ratably on the same date
that the dividends and interest were received by the
estate or trust.
‘‘(3) CERTAIN
NONRESIDENT
ALIENS
INELI-
GIBLE
FOR
EXCLUSION.—In the case of a non-
resident alien individual, subsection (a) shall apply
only—
‘‘(A) in determining the tax imposed for
the taxable year pursuant to section 871(b)(1)
and only in respect of dividends and interest
which are effectively connected with the conduct
of a trade or business within the United States,
or
‘‘(B) in determining the tax imposed for
the taxable year pursuant to section 877(b).’’
(b) CLERICAL AND CONFORMING AMENDMENTS.—
(1) The table of sections for part III of sub-
chapter B of chapter 1 of such Code is amended by
inserting after the item relating to section 115 the
following new item:
‘‘Sec. 116. Partial exclusion of dividends and interest received by
individuals.’’
(2) Paragraph (2) of section 265(a) of such
Code is amended by inserting before the period at
the end thereof the following: ‘‘, or to purchase or
carry obligations or shares, or to make deposits, to
the extent the interest thereon is excludable from
gross income under section 116’’.
(3) Subsection (c) of section 584 of such Code
is amended by adding at the end thereof the follow-
ing new sentence:
‘‘The proportionate share of each participant in the
amount of dividends or interest received by the common
trust fund and to which section 116 applies shall be con-
sidered for purposes of such section as having been re-
ceived by such participant.’’
(4) Subsection (a) of section 643 of such Code
is amended by inserting after paragraph (6) the fol-
lowing new paragraph:
‘‘(7) DIVIDENDS OR INTEREST.—There shall be
included the amount of any dividends or interest ex-
cluded from gross income pursuant to section 116.’’
(5) Section 854 of such Code is amended by
adding at the end thereof the following new sub-
section:
‘‘(c) TREATMENT UNDER SECTION 116.—
‘‘(1) IN
GENERAL.—For purposes of section
116, in the case of any dividend (other than a divi-
dend described in subsection (a)) received from a
regulated investment company which meets the re-
quirements of section 852 for the taxable year in
which it paid the dividend—
‘‘(A) the entire amount of such dividend
shall be treated as a dividend if the aggregate
dividends and interest received by such com-
pany during the taxable year equal or exceed 75
percent of its gross income, or
‘‘(B) if subparagraph (A) does not apply,
a portion of such dividend shall be treated as
a dividend (and a portion of such dividend shall
be treated as interest) based on the portion of
the company’s gross income which consists of
aggregate dividends or aggregate interest, as
the case may be.
For purposes of the preceding sentence, gross in-
come and aggregate interest received shall each be
reduced by so much of the deduction allowable by
section 163 for the taxable year as does not exceed
aggregate interest received for the taxable year.
‘‘(2) NOTICE TO SHAREHOLDERS.—The amount
of any distribution by a regulated investment com-
pany which may be taken into account as a dividend
for purposes of the exclusion under section 116 shall
not exceed the amount so designated by the com-
pany in a written notice to its shareholders mailed
not later than 45 days after the close of its taxable
year.
‘‘(3) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) The term ‘gross income’ does not in-
clude gain from the sale or other disposition of
stock or securities.
‘‘(B) The term ‘aggregate dividends re-
ceived’ includes only dividends received from do-
mestic corporations other than dividends de-
scribed in section 116(b)(2). In determining the
amount of any dividend for purposes of this
subparagraph, the rules provided in section
116(c)(1) (relating to certain distributions)
shall apply.’’
(6) Subsection (c) of section 857 of such Code
is amended to read as follows:
‘‘(c) LIMITATIONS APPLICABLE TO DIVIDENDS RE-
CEIVED FROM REAL ESTATE INVESTMENT TRUSTS.—
‘‘(1) IN
GENERAL.—For purposes of section
116 (relating to an exclusion for dividends and inter-
est received by individuals) and section 243 (relating
to deductions for dividends received by corpora-
tions), a dividend received from a real estate invest-
ment trust which meets the requirements of this
part shall not be considered as a dividend.
‘‘(2) TREATMENT AS INTEREST.—In the case of
a dividend (other than a capital gain dividend, as de-
fined in subsection (b)(3)(C)) received from a real
estate investment trust which meets the require-
ments of this part for the taxable year in which it
paid the dividend—
‘‘(A) such dividend shall be treated as in-
terest if the aggregate interest received by the
real estate investment trust for the taxable year
equals or exceeds 75 percent of its gross in-
come, or
‘‘(B) if subparagraph (A) does not apply,
the portion of such dividend which bears the
same ratio to the amount of such dividend as
the aggregate interest received bears to gross
income shall be treated as interest.
‘‘(3) ADJUSTMENTS TO GROSS INCOME AND AG-
GREGATE
INTEREST
RECEIVED.—For purposes of
paragraph (2)—
‘‘(A) gross income does not include the net
capital gain,
‘‘(B) gross income and aggregate interest
received shall each be reduced by so much of
the deduction allowable by section 163 for the
taxable year (other than for interest on mort-
gages on real property owned by the real estate
investment trust) as does not exceed aggregate
interest received by the taxable year, and
‘‘(C) gross income shall be reduced by the
sum of the taxes imposed by paragraphs (4),
(5), and (6) of section 857(b).
‘‘(4) NOTICE TO SHAREHOLDERS.—The amount
of any distribution by a real estate investment trust
which may be taken into account as interest for pur-
poses of the exclusion under section 116 shall not
exceed the amount so designated by the trust in a