To amend the Internal Revenue Code of 1986 to eliminate the double taxation of dividends.

January 7, 2003

Mr. COX (for himself, Mrs. BIGGERT, Mr. BROWN of South Carolina, Mr. BURTON of Indiana, Mr. CANTOR, Mrs. JO ANN DAVIS of Virginia, Mr. DEMINT, Mr. DUNCAN, Mr. ENGLISH, Mr. FLAKE, Mr. GALLEGLY, Mr. HERGER, Mr. HYDE, Mr. ISTOOK, Mr. KOLBE, Mr. LATHAM, Mr. JEFF MILLER of Florida, Mr. NETHERCUTT, Mr. OTTER, Mr. PAUL, Mr. PENCE, Mr. PETRI, Mr. PLATTS, Mr. SESSIONS, Mr. SHADEGG, Mr. SHUSTER, Mr. SMITH of Michigan, Mr. SOUDER, Mr. SWEENEY, Mr. TIAHRT, Mr. WELDON of Florida, and Mr. WILSON of South Carolina) introduced the following bill; which was referred to the Committee on Ways and Means

To amend the Internal Revenue Code of 1986 to eliminate the double taxation of dividends.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Investor Protection, Market Stabilization, and Tax Fairness Restoration Act of 2002'.

SEC. 2. FINDINGS.

Congress finds that:

(1) Corporate earnings paid out as dividends are taxed once at the full corporate rate, and again at the full individual rate, leading to an effective rate that can be in excess of 60%.

(2) This confiscatory taxation of dividends has contributed to a steady diminution of dividend payout ratios and the virtual elimination of dividends as the primary method of rewarding equity investors for risk.

(3) When taxation makes dividend distributions uneconomical, investors are forced to look at sale or collateralization of stock as essentially the only ways of achieving an adequate rate of return on investment.

(4) As a result, even companies with healthy earnings are unable to protect their investors from loss during a stock market downturn.

SEC. 3. PURPOSE.

The purpose of this Act is to protect taxpaying investors in America's equity markets, promote a greater correlation between earnings and equity prices, and encourage economic growth by eliminating the unfair double taxation of dividends.

SEC. 4. ELIMINATION OF DOUBLE TAX ON DIVIDENDS.

(a) DIVIDENDS RECEIVED BY INDIVIDUALS-

(1) CREDIT FOR TAX PAID BY DISTRIBUTING CORPORATION- Part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end thereof the following new subpart:

`Subpart H--Individual Shareholder Credit

`Sec. 54. Allowance of shareholder credit.

`Sec. 54A. Determination of shareholder credit.

`Sec. 54B. Inclusion of shareholder credit.

`SEC. 54. ALLOWANCE OF SHAREHOLDER CREDIT.

`(a) GENERAL RULE- In the case of a taxpayer other than a corporation, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the shareholder credits determined with respect to dividends from domestic corporations received by the taxpayer during the taxable year.

`(b) LIMITATION- The amount allowed as a credit under subsection (a) for any taxable year shall not exceed the sum of--

`(1) the regular tax liability of the taxpayer for the taxable year reduced by the sum of the credits allowable under this part (other than subpart C), and

`(2) the minimum tax imposed by section 55.

`(c) NONRESIDENT ALIENS- No credit shall be allowed under this section to any nonresident alien with respect to any dividend unless such dividend is taxable under section 871(b) (relating to income effectively connected with United States business).

`SEC. 54A. DETERMINATION OF SHAREHOLDER CREDIT.

`(a) GENERAL RULE- For purposes of this subpart, the shareholder credit with respect to any dividend paid by a domestic corporation is an amount which bears the same ratio to such corporation's post-2002 Federal income taxes as--

`(1) the amount of such dividend (determined without regard to section 54B), bears to

`(2) such corporation's post-2002 undistributed earnings.

`(b) POST-2002 FEDERAL INCOME TAXES- For purposes of this section--

`(1) IN GENERAL- The term `post-2002 Federal income taxes' means the sum of--

`(A) the Federal income taxes with respect to the taxable year of the distributing corporation in which the dividend is distributed, plus

`(B) the Federal income taxes with respect to prior taxable years of such corporation beginning after December 31, 2002, reduced by the amount of shareholder credits determined with respect to distributions by such corporation in such prior taxable years.

`(2) FEDERAL INCOME TAXES- The term `Federal income taxes' means any tax paid by the corporation under this chapter. Any shareholder credit determined under this section with respect to a dividend received by the corporation during any taxable year shall be treated as a tax paid by the corporation under this chapter for such taxable year.

`(c) POST-2002 UNDISTRIBUTED EARNINGS- For purposes of this section, the term `post-2002 undistributed earnings' means the earnings and profits of the distributing corporation accumulated in taxable years beginning after December 31, 2002, determined--

`(1) as of the close of the taxable year in which the dividend is distributed, and

`(2) without diminution by reason of dividends distributed during such taxable year.

`SEC. 54B. INCLUSION OF SHAREHOLDER CREDIT.

`In the case of a taxpayer other than a corporation, gross income shall include the amount of the shareholder credits determined under section 54A with respect to dividends received by such shareholder.'

(2) CLERICAL AMENDMENT- The table of subparts for part IV of subchapter A of chapter 1 of such Code is amended by adding at the end thereof the following new item:

`Subpart H. Individual shareholder credit.'

(3) EFFECTIVE DATE- The amendments made by this subsection shall apply to dividends paid out of earnings and profits for taxable years beginning after December 31, 2002.

(b) DIVIDENDS RECEIVED BY CORPORATIONS-

(1) IN GENERAL- Subsection (a) of section 243 of such Code (relating to dividends received by corporations) is amended to read as follows:

`(a) GENERAL RULE- In the case of a corporation, there shall be allowed as a deduction an amount equal to 100 percent of the amount received as dividends from a domestic corporation which is subject to taxation under this chapter.'

(2) DIVIDENDS ON CERTAIN PREFERRED STOCK- Section 244 of such Code (relating to dividends received on certain preferred stock) is amended--

(A) by striking `70 percent' in subsection (a)(3) and inserting `100 percent',

(B) by striking `(a) IN GENERAL- ', and

(C) by striking subsection (b).

(3) Technical, conforming and clerical amendments-

(A) Section 243 of such Code (relating to dividends received by corporations) is amended by striking subsections (b) and (c) and by redesignating subsections (d) and (e) as subsections (b) and (c), respectively.

(B) Subsection (b) of section 246 of such Code (relating to rules applying to deductions for dividends received) is amended--

(i) in paragraph (1) by striking `243(a)(1), 244(a)' each time it appears and inserting `243, 244' and by striking `the percentage determined under paragraph (3) of', and

(ii) by striking paragraph (3).

(C)(i) Subparagraph (A) of section 805(a)(4) of such Code (relating to dividends received by life insurance companies) is amended by striking all that follows `subparagraph (B))' and inserting a period.

(ii) Subparagraph (B) of section 805(a)(4) of such Code is amended--

(I) by striking `243(a)(1), 244(a)' each place it appears and inserting `243, 244',

(II) by striking `the percentage determined under section 246(b)(3) of', and

(III) by striking `(and such limitation shall be applied as provided in section 246(b)(3))'.

(iii) Paragraph (4) of section 805(a) of such Code is amended by striking subparagraphs (C), (D), (E), and (F) and inserting the following:

`(C) DISTRIBUTIONS OUT OF TAX-EXEMPT INTEREST- No deduction shall be allowed by reason of this paragraph with respect to any dividend to the extent the dividend is a distribution out of tax-exempt interest.'

(D) Subparagraph (C) of section 861(a)(2) of such Code (relating to income from sources within the United States) is amended by striking `243(e)' and inserting `243(c)'.

(E) Subparagraph (B) of section 1504(c)(2) of such Code (relating to definition of includible insurance companies) is amended by striking clause (i) and by redesignating clauses (ii) and (iii) as clauses (i) and (ii), respectively.

(4) EFFECTIVE DATE- The amendments made by this subsection shall apply to taxable years ending after the date of the enactment of this Act.

END