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).’’. 
(D) Section 593(b)(2)(D)(v) of such Code is 
amended—
(i) by striking ‘‘if there is a capital gain 
rate 
differential 
(as 
defined 
in 
section 
904(b)(3)(D)) for the taxable year,’’, and 
(ii) by striking ‘‘section 904(b)(3)(E)’’ and 
inserting ‘‘section 904(b)(3)(D)’’. 
(9) Section 1044(d) of such Code is amended 
by striking the last sentence. 
(10)(A) Section 1211(b)(2) of such Code is 
amended to read as follows: 
‘‘(2) the sum of—
‘‘(A) the excess of the net short-term cap-
ital loss over the net long-term capital gain, and 
‘‘(B) one-half of the excess of the net long-
term capital loss over the net short-term capital 
gain.’’.
(B) So much of section 1212(b)(2) of such 
Code as precedes subparagraph (B) thereof is 
amended to read as follows: 
‘‘(2) SPECIAL RULES.—
‘‘(A) ADJUSTMENTS.—
‘‘(i) For purposes of determining the 
excess referred to in paragraph (1)(A), 
there shall be treated as short-term capital 
gain in the taxable year an amount equal 
to the lesser of—
‘‘(I) the amount allowed for the 
taxable year under paragraph (1) or 
(2) of section 1211(b), or 
‘‘(II) the adjusted taxable income 
for such taxable year. 
‘‘(ii) For purposes of determining the 
excess referred to in paragraph (1)(B), 
there shall be treated as short-term capital 
gain in the taxable year an amount equal 
to the sum of—
‘‘(I) the amount allowed for the 
taxable year under paragraph (1) or 
(2) of section 1211(b) or the adjusted 
taxable income for such taxable year, 
whichever is the least, plus
‘‘(II) the excess of the amount 
described in subclause (I) over the net 
short-term capital loss (determined) 
without regard to this subsection) for 
such year.’’. 
(C) Section 1212(b) of such Code is amended 
by adding at the end the following: 
‘‘(3) TRANSITIONAL RULE.—In the case of any 
amount which, under this subsection and section 
1211(b) (as in effect for taxable years beginning be-
fore January 1, 2004), is treated as a capital loss 
in the first taxable year beginning after December 
31, 2003, paragraph (2) and section 1211(b) (as so 
in effect) shall apply (and paragraph (2) and section 
1211(b) as in effect for taxable years beginning 
after December 31, 2003, shall not apply) to the ex-
tent such amount exceeds the total of any capital 
gain net income (determined without regard to this 
subsection) for taxable years beginning after Decem-
ber 31, 2003.’’. 
(11) Section 1402(i)(1) of such Code is amend-
ed by inserting ‘‘, and the deduction provided by sec-
tion 1202 shall not apply’’ before the period at the 
end thereof.
(12) Section 1445(e) of such Code is amend-
ed—
(A) in paragraph (1), by striking ‘‘35 per-
cent (or, to the extent provided in regulations, 
20 percent)’’ and inserting ‘‘17.5 percent (or, to 
the extent provided in regulation, 15.6 per-
cent)’’, and 
(B) in paragraph (2), by striking ‘‘35 per-
cent’’ and inserting ‘‘17.5 percent’’. 
(13)(A) 
The 
second 
sentence 
of 
section 
7518(g)(6)(A) of such Code is amended—
(i) by striking ‘‘during a taxable year to 
which section 1(h) or 1201(a) applies’’, and 
(ii) by striking ‘‘20 percent (34 percent’’ 
and inserting ‘‘10 percent (15.3 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 (34 percent’’ 
and inserting ‘‘10 percent (15.3 percent’’.
(14) The item relating to section 1202 in the 
table of sections for part I of subchapter P of chap-
ter 1 of such Code is amended to read as follows:
‘‘Sec. 1202. Capital gains deduction.’’.
(d) EFFECTIVE DATES.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments, made by 
this section apply to taxable years ending after De-
cember 31 of the year which includes the date of en-
actment of this Act. 
(2) REPEAL
OF
SECTION 1(h).—The amend-
ment made by subsection (c)(1) applies to taxable 
years beginning on or after January 1 of the year 
following the date of enactment of this Act. 
(3) CONTRIBUTIONS.—The amendment made 
by subsection (c)(2) applies to contributions on or 
after January 1 of the year following the date of en-
actment of this Act. 
(4) USE OF LONG-TERM LOSSES.—The amend-
ments made by subsection (c)(10) apply to taxable 
years beginning on or after January 1 of the second 
year following the date of enactment of this Act. 
(5) WITHHOLDING.—The amendments made by 
subsection (c)(12) apply only to amounts paid on or 
after January 1 of the year following the date of en-
actment of this Act.
SEC. 3. 55-PERCENT EXCLUSION OF DIVIDEND INCOME 
FROM TAX. 
(a) IN GENERAL.—Part III of subchapter B of chap-
ter 1 of the Internal Revenue Code of 1986 (relating to 
amounts specifically excluded from gross income) is 
amended by inserting after section 115 the following new 
section: 
‘‘SEC. 116. 55-PERCENT EXCLUSION OF DIVIDENDS RE-
CEIVED BY INDIVIDUALS. 
‘‘(a) EXCLUSION FROM GROSS INCOME.—Gross in-
come does not include 55 percent of the amounts received 
during the taxable year by an individual as dividends from 
domestic corporations. 
‘‘(b) CERTAIN DIVIDENDS EXCLUDED.—Subsection 
(a) shall not apply to any dividend from a corporation 
which, for the taxable year of the corporation 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 (relating to certain charitable, etc., or-
ganization) or section 521 (relating to farmers’ coopera-
tive associations). 
‘‘(c) SPECIAL RULES.—For purposes of this sec-
tion—
‘‘(1) EXCLUSION NOT TO APPLY TO CAPITAL 
GAIN
DIVIDENDS
FROM
REGULATED
INVESTMENT
COMPANIES
AND
REAL
ESTATE
INVESTMENT 
TRUSTS.—
‘‘For treatment of capital gain dividends, see sec-
tions 854(a) and 857(c).
‘‘(2) 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 which are effec-
tively 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). 
‘‘(3) DIVIDENDS FROM EMPLOYEE STOCK OWN-
ERSHIP PLANS.—Subsection (a) shall not apply to 
any dividend described in section 404(k).’’
(b) CONFORMING AMENDMENTS.—
(1)(A) Subparagraph (A) of section 135(c)(4) 
of such Code is amended by inserting ‘‘116,’’ before 
‘‘137’’. 
(B) Subsection (d) of section 135 of such Code 
is amended by redesignating paragraph (4) as para-
graph (5) and by inserting after paragraph (3) the 
following new paragraph:
‘‘(4) COORDINATION WITH SECTION 116.—This 
section shall be applied before section 116.’’
(2) Subsection (c) of section 584 of such Code 
is amended by adding at the end thereof the fol-
lowing new flush sentence: 
‘‘The proportionate share of each participant in the 
amount of dividends received by the common trust fund 
and to which section 116 applies shall be considered for 
purposes of such section as having been received by such 
participant.’’
(3) Subsection (a) of section 643 of such Code 
is amended by redesignating paragraph (7) as para-
graph (8) and by inserting after paragraph (6) the 
following new paragraph: 
‘‘(7) DIVIDENDS.—There shall be included the 
amount of any dividends excluded from gross income 
pursuant to section 116.’’
(4) Section 854(a) of such Code is amended by 
inserting ‘‘section 116 (relating to partial exclusion 
of dividends received by individuals) and’’ after ‘‘For 
purposes of’’. 
(5) Section 857(c) of such Code is amended to 
read as follows: 
‘‘(c) RESTRICTIONS APPLICABLE TO DIVIDENDS RE-
CEIVED FROM REAL ESTATE INVESTMENT TRUSTS.—
‘‘(1) TREATMENT FOR SECTION 116.—For pur-
poses of section 116 (relating to partial exclusion of 
dividends received by individuals), a capital gain div-
idend (as defined in subsection (b)(3)(C)) received 
from a real estate investment trust which meets the 
requirements of this part shall not be considered as 
a dividend. 
‘‘(2) TREATMENT FOR SECTION 243.—For pur-
poses of section 243 (relating to deductions for divi-
dends received by corporations), a dividend received 
from a real estate investment trust which meets the 
requirements of this part shall not be considered as 
a dividend.’’
(6) 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. 55-percent exclusion of dividends received by individ-
uals.’’
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years ending after De-
cember 31 of the year which includes the date of enact-
ment of this Act.
Æ