change of capital assets held for more than 1 year, 
proper adjustment shall be made for any exclusion 
allowable under section 1202 and any deduction al-
lowable under section 1203 to the estate or trust. In 
the case of a trust, the deduction allowed by this 
subsection shall be subject to section 681 (relating 
to unrelated business income).’’. 
(8) Section 642 is amended by adding at the 
end the following new subsection: 
‘‘(j) CAPITAL GAINS DEDUCTION.—The deduction 
under section 1203 to an estate or trust shall be computed 
by excluding the portion (if any) of the gains for the tax-
able year which is includible by the income beneficiaries 
under sections 652 and 662 (relating to inclusions of 
amounts in gross income of beneficiaries of trusts) as gain 
derived from the sale or exchange of capital assets.’’. 
(9) The last sentence of section 643(a)(3) is 
amended to read as follows: ‘‘The exclusion under 
section 1202 and the deduction under section 1203 
shall not be taken into account.’’. 
(10) Subparagraph (C) of section 643(a)(6) is 
amended by inserting ‘‘(i)’’ before ‘‘there shall’’ and 
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’’.
(11) Paragraph (4) of section 691(c) is amend-
ed by striking ‘‘1(h),’’ and by inserting ‘‘1203,’’ 
after ‘‘1202,’’. 
(12) The second sentence of paragraph (2) of 
section 871(a) is amended by striking ‘‘section 
1202’’ and inserting ‘‘sections 1202 and 1203’’. 
(13)(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).’’. 
(14) 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. 
(15) Paragraph (1) of section 1445(e) is 
amended by striking ‘‘15 percent’’ and inserting 
‘‘24.5 percent’’. 
(16)(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