DIVIDENDS OF INDIVIDUALS TAXED AT CAPITAL GAIN RATES.

SEC. 302. DIVIDENDS OF INDIVIDUALS TAXED AT CAPITAL GAIN RATES.(a) In General.—Section 1(h) (relating to maximum capital gains rate), as amended by section 301, is amended by adding at the end the following new paragraph:“(11) 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 during the taxable year from—“(I) domestic corporations, and“(II) qualified foreign corporations.“(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) Coordination with section 246(c).—Such term shall not include any dividend on any share of stock—“(I) with respect to which the holding period requirements of section 246(c) are not met (determined by substituting in section 246(c)(1) ‘60 days’ for ‘45 days’ each place it appears and by substituting ‘120-day period’ for ‘90-day period’), or117 STAT. 761“(II) to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. “(C) Qualified foreign corporations.—“(i) In general.—Except as otherwise provided in this paragraph, the term ‘qualified foreign corporation’ means any foreign corporation if—“(I) such corporation is incorporated in a possession of the United States, or“(II) such corporation is eligible for benefits of a comprehensive income tax treaty with the United States which the Secretary determines is satisfactory for purposes of this paragraph and which includes an exchange of information program.“(ii) Dividends on stock readily tradable on united states securities market.—A foreign corporation not otherwise treated as a qualified foreign corporation under clause (i) shall be so treated with respect to any dividend paid by such corporation if the stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States.“(iii) Exclusion of dividends of certain foreign corporations.—Such term shall not include any foreign corporation which for the taxable year of the corporation in which the dividend was paid, or the preceding taxable year, is a foreign personal holding company (as defined in section 552), a foreign investment company (as defined in section 1246(b)), or a passive foreign investment company (as defined in section 1297).“(iv) Coordination with foreign tax credit limitation.—Rules similar to the rules of section 904(b)(2)(B) shall apply with respect to the dividend rate differential under this paragraph.“(D) 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) Extraordinary dividends.—If an individual receives, with respect to any share of stock, qualified dividend income from 1 or more dividends which are extraordinary dividends (within the meaning of section 1059(c)), any loss on the sale or exchange of such share shall, to the extent of such dividends, be treated as long-term capital loss.“(iii) Treatment of dividends from regulated investment companies and real estate investment trusts.—A dividend received from a regulated investment company or a real estate investment trust shall be subject to the limitations prescribed in sections 854 and 857.”.117 STAT. 762(b) Exclusion of Dividends From Investment Income.—Subparagraph (B) of section 163(d)(4) (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)(11)(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 (relating to dividends received from regulated investment companies) is amended by inserting “section 1(h)(11) (relating to maximum rate of tax on dividends) and” after “For purposes of”.(2) Paragraph (1) of section 854(b) (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 are less than 95 percent of its gross income, then, in computing the maximum rate under section 1(h)(11), 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.“(iii) Dividends from real estate investment trusts.—For purposes of clause (i)—“(I) paragraph (3)(B)(ii) shall not apply, and“(II) in the case of a distribution from a trust described in such paragraph, the amount of such distribution which is a dividend shall be subject to the limitations under section 857(c).“(iv) Dividends from qualified foreign corporations.—For purposes of clause (i), dividends received from qualified foreign corporations (as defined in section 1(h)(11)) shall also be taken into account in computing aggregate dividends received.”.(3) Subparagraph (C) of section 854(b)(1), as redesignated by paragraph (2), is amended by striking “subparagraph (A)” and inserting “subparagraph (A) or (B)”.(4) Paragraph (2) of section 854(b) is amended by inserting “the maximum rate under section 1(h)(11) and” after “for purposes of”.(5) Subsection (b) of section 854 is amended by adding at the end the following new paragraph:“(5) Coordination with section 1(h)(11).—For purposes of paragraph (1)(B), an amount shall be treated as a dividend only if the amount is qualified dividend income (within the meaning of section 1(h)(11)(B)).”.117 STAT. 763(d) Treatment of Dividends Received From Real Estate Investment Trusts.—Section 857(c) (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.—“(1) Section 243.—For purposes of section 243 (relating to deductions for dividends 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.“(2) Section 1(h)(11).—For purposes of section 1(h)(11) (relating to maximum rate of tax on dividends)—“(A) rules similar to the rules of subparagraphs (B) and (C) of section 854(b)(1) shall apply to dividends received from a real estate investment trust which meets the requirements of this part, and“(B) for purposes of such rules, such a trust shall be treated as receiving qualified dividend income during any taxable year in an amount equal to the sum of—“(i) the excess of real estate investment trust taxable income computed under section 857(b)(2) for the preceding taxable year over the tax payable by the trust under section 857(b)(1) for such preceding taxable year, and“(ii) the excess of the income subject to tax by reason of the application of the regulations under section 337(d) for the preceding taxable year over the tax payable by the trust on such income for such preceding taxable year.”.(e) Conforming Amendments.—(1) Paragraph (3) of section 1(h), as redesignated by section 301, is amended to read as follows:“(3) Adjusted net capital gain.—For purposes of this subsection, the term ‘adjusted net capital gain’ means the sum of—“(A) net capital gain (determined without regard to paragraph (11)) reduced (but not below zero) by the sum of—“(i) unrecaptured section 1250 gain, and“(ii) 28-percent rate gain, plus“(B) qualified dividend income (as defined in paragraph (11)).”.(2) Subsection (f) of section 301 is amended adding at the end the following new paragraph:“(4) For taxation of dividends received by individuals at capital gain rates, see section 1(h)(11).”.(3) Paragraph (1) of section 306(a) is amended by adding at the end the following new subparagraph:“(D) Treatment as dividend.—For purposes of section 1(h)(11) and such other provisions as the Secretary may specify, any amount treated as ordinary income under this paragraph shall be treated as a dividend received from the corporation.”.(4)(A) Subpart C of part II of subchapter C of chapter 1 (relating to collapsible corporations) is repealed.(B)(i) Section 338(h) is amended by striking paragraph (14).117 STAT. 764(ii) Sections 467(c)(5)(C), 1255(b)(2), and 1257(d) are each amended by striking “, 341(e)(12),”.(iii) The table of subparts for part II of subchapter C of chapter 1 is amended by striking the item related to subpart C.(5) Section 531 is amended by striking “equal to” and all that follows and inserting “equal to 15 percent of the accumulated taxable income.”.(6) Section 541 is amended by striking “equal to” and all that follows and inserting “equal to 15 percent of the undistributed personal holding company income.”.(7) Section 584(c) is amended by adding at the end the following new flush sentence:“The proportionate share of each participant in the amount of dividends received by the common trust fund and to which section 1(h)(11) applies shall be considered for purposes of such paragraph as having been received by such participant.”.(8) Paragraph (5) of section 702(a) is amended to read as follows:“(5) dividends with respect to which section 1(h)(11) or part VIII of subchapter B applies,”.(f) Effective Date.—(1) In general.—Except as provided in paragraph (2), the amendments made by this section shall apply to taxable years beginning after December 31, 2002.(2) Regulated investment companies and real estate investment trusts.—In the case of a regulated investment company or a real estate investment trust, the amendments made by this section shall apply to taxable years ending after December 31, 2002; except that dividends received by such a company or trust on or before such date shall not be treated as qualified dividend income (as defined in section 1(h)(11)(B) of the Internal Revenue Code of 1986, as added by this Act).