A bill to amend the Internal Revenue Code of 1986 to provide that dividend income of individuals not be taxed at rates in excess of the maximum capital gains rate.

SECTION 1. DIVIDENDS OF INDIVIDUALS TAXED AT CAPITAL GAIN RATES.

    (a) In General.--Section 1(h) of the Internal Revenue Code of 1986 
(relating to maximum capital gains rate) is amended by adding at the 
end the following new paragraph:
            ``(13) 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 `qualified 
                        dividend income' means dividends received from 
                        domestic corporations during the taxable year.
                            ``(ii) Certain dividends excluded.--Such 
                        term shall not include--
                                    ``(I) any dividend from a 
                                corporation 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) Minimum holding period.--Such term 
                        shall not include any dividend on any share of 
                        stock with respect to which the holding period 
                        requirements of section 246(c) are not met.
                    ``(C) Special rules.--
                            ``(i) Amounts taken into account as 
                        investment income.--Qualified dividend income 
                        shall not include any amount which the taxpayer 
                        takes into account as investment income under 
                        section 163(d)(4)(B).
                            ``(ii) Nonresident aliens.--In the case of 
                        a nonresident alien individual, subparagraph 
                        (A) shall apply only--
                                    ``(I) in determining the tax 
                                imposed for the taxable year pursuant 
                                to section 871(b) and only in respect 
                                of amounts which are effectively 
                                connected with the conduct of a trade 
                                or business within the United States, 
                                and
                                    ``(II) in determining the tax 
                                imposed for the taxable year pursuant 
                                to section 877.
                            ``(iii) Treatment of dividends from 
                        regulated investment companies and real estate 
                        investment trusts.--

                                ``For treatment of dividends from 
regulated investment companies and real estate investment trusts, see 
sections 854 and 857.''
    (b) Exclusion of Dividends From Investment Income.--Subparagraph 
(B) of section 163(d)(4) of the Internal Revenue Code of 1986 (defining 
net investment income) is amended by adding at the end the following 
flush sentence:
                ``Such term shall include qualified dividend income (as 
                defined in section 1(h)(13)(B)) only to the extent the 
                taxpayer elects to treat such income as investment 
                income for purposes of this subsection.''
    (c) Treatment of Dividends From Regulated Investment Companies.--
            (1) Subsection (a) of section 854 of the Internal Revenue 
        Code of 1986 (relating to dividends received from regulated 
        investment companies) is amended by inserting ``section 
        1(h)(13) (relating to maximum rate of tax on dividends and 
        interest) and'' after ``For purposes of''.
            (2) Paragraph (1) of section 854(b) of such Code (relating 
        to other dividends) is amended by redesignating subparagraph 
        (B) as subparagraph (C) and by inserting after subparagraph (A) 
        the following new subparagraph:
                    ``(B) Maximum rate under section 1(h).--
                            ``(i) In general.--If the aggregate 
                        dividends received by a regulated investment 
                        company during any taxable year is less than 95 
                        percent of its gross income, then, in computing 
                        the maximum rate under section 1(h)(13), rules 
                        similar to the rules of subparagraph (A) shall 
                        apply.
                            ``(ii) Gross income.--For purposes of 
                        clause (i), in the case of 1 or more sales or 
                        other dispositions of stock or securities, the 
                        term `gross income' includes only the excess 
                        of--
                                    ``(I) the net short-term capital 
                                gain from such sales or dispositions, 
                                over
                                    ``(II) the net long-term capital 
                                loss from such sales or dispositions.''
            (3) Subparagraph (C) of section 854(b)(1) of such Code, as 
        redesignated by paragraph (2), is amended by striking 
        ``subparagraph (A)'' and inserting ``subparagraph (A) or (B)''.
            (4) Paragraph (2) of section 854(b) of such Code is amended 
        by inserting ``the maximum rate under section 1(h)(13) and'' 
        after ``for purposes of''.
    (d) Treatment of Dividends Received From Real Estate Investment 
Trusts.--Section 857(c) of the Internal Revenue Code of 1986 (relating 
to restrictions applicable to dividends received from real estate 
investment trusts) is amended to read as follows:
    ``(c) Restrictions Applicable To Dividends Received From Real 
Estate Investment Trusts.--For purposes of section 1(h)(13) (relating 
to maximum rate of tax on dividends) and section 243 (relating to 
deductions received by corporations), a dividend received from a real 
estate investment trust which meets the requirements of this part shall 
not be considered a dividend.''
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

Summary: Amends the Internal Revenue Code to provide that dividend income shall be taxed as net capital gain.