To amend the Internal Revenue Code of 1986 to give a deduction to corporations for dividends paid and to exclude dividends from gross income.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Dividend Incentive and Tax 
Simplification Act of 2002''.

SEC. 2. DEDUCTION FOR DIVIDENDS PAID.

    (a) In General.--Part VIII of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 (relating to special deductions for 
corporations) is amended by adding at the end the following new 
section:

``SEC. 250. DIVIDENDS PAID BY CORPORATIONS.

    ``(a) In General.--In the case of a domestic corporation, there 
shall be allowed as a deduction for the taxable year an amount equal to 
the amount of dividends paid during the taxable year.
    ``(b) Exceptions.--Subsection (a) shall not apply to--
            ``(1) any dividend from--
                    ``(A) a regulated investment company,
                    ``(B) a real estate investment trust, or
                    ``(C) an S corporation,
            ``(2) any dividend of a corporation which for the taxable 
        year of the corporation in which the distribution is made is a 
        corporation exempt from tax under section 521 (relating to 
        farmers' cooperative associations), and
            ``(3) any dividend described in section 404(k).
    ``(c) Disallowance of Dividends Received Deduction.--In the case of 
the deduction allowed by subsection (a) with respect to any dividend, 
no deduction shall be allowed under any other provision of this part 
with respect to such dividend.''.
    (b) Clerical Amendment.--The table of sections for part VIII of 
subchapter B of chapter 1 of such Code is amended by adding at the end 
the following new item:

                              ``Sec. 250. Dividends paid by 
                                        corporations.''.
     (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 3. DIVIDENDS RECEIVED BY INDIVIDUALS TAXED AT CAPITAL GAIN RATES.

    (a) In General.--Subsection (h) of section 1 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, the term `qualified dividend income' 
                means dividends received from domestic corporations 
                during the taxable year other than--
                            ``(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 dividend from a real estate 
                        investment trust which, for the taxable year in 
                        which the dividend is paid, qualified under 
                        part II of subchapter M,
                            ``(iii) any amount allowed as a deduction 
                        under section 591 (relating to deduction for 
                        dividends paid by mutual savings banks, etc.),
                            ``(iv) any dividend described in section 
                        404(k),
                            ``(v) any dividend on any share of stock 
                        with respect to which the holding period 
                        requirements of section 246(c) are not met, and
                            ``(vi) any dividend which the taxpayer 
                        takes into account as investment income under 
                        section 163(d)(4)(B).
                    ``(C) Special rule for 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 dividends 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.
                    ``(D) Treatment of dividends from regulated 
                investment companies.--

                                ``For treatment of dividends from 
regulated investment companies, see section 854.''.
    (b) Treatment of Dividends From Regulated Investment Companies.--
            (1) Subsection (a) of section 854 of such Code is amended 
        by inserting ``section 1(h)(13) (relating to maximum rate of 
        tax on dividends) and'' after ``For purposes of''.
            (2) Paragraph (1) of section 854(b) of such Code 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 are 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''.
    (c) Exclusion of Dividends From Investment Income.--Subparagraph 
(B) of section 163(d)(4) of such Code 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.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

Summary: Dividend Incentive and Tax Simplification Act of 2002 - Amends the Internal Revenue Code to: (1) allow, for a corporation, a deduction for dividends paid; and (2) tax dividends received by individuals as capital gain.