To amend the Internal Revenue Code of 1986 to simplify and reduce the capital gain rates for all taxpayers and to exclude from gross income 55 percent of the dividends received by individuals, and for other purposes.

January 7, 2003

Mr. REYNOLDS (for himself, Mr. DOOLITTLE, Mr. ENGLISH, and Mr. SOUDER) introduced the following bill; which was referred to the Committee on Ways and Means

To amend the Internal Revenue Code of 1986 to simplify and reduce the capital gain rates for all taxpayers and to exclude from gross income 55 percent of the dividends received by individuals, and for other purposes.

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 `Restoring Investor Confidence Act of 2003'.

SEC. 2. 55-PERCENT CAPITAL GAINS DEDUCTION FOR TAXPAYERS OTHER THAN CORPORATIONS.

(a) IN GENERAL- Section 1202 of the Internal Revenue Code of 1986 is amended to read as follows:

`SEC. 1202. CAPITAL GAINS DEDUCTION.

`(a) GENERAL RULE- If for any taxable year a taxpayer other than a corporation has a net capital gain, 55 percent of such gain shall be a deduction from gross income.

`(b) ESTATES AND TRUSTS- In the case of an estate or trust, the deduction shall be computed by excluding the portion (if any) of the gains for the taxable year from sales or exchanges of capital assets which, under sections 652 and 662 (relating to inclusions of amounts in gross income of beneficiaries of trusts), is includible by the income beneficiaries as gain derived from the sale or exchange of capital assets.

`(c) COORDINATION WITH TREATMENT OF CAPITAL GAIN UNDER LIMITATION ON INVESTMENT INTEREST- For purposes of this section, the net capital gain for any taxable year shall be reduced (but not below zero) by the amount which the taxpayer takes into account as investment income under section 163(d)(4)(B)(iii).

`(d) TRANSITIONAL RULE-

`(1) IN GENERAL- In the case of a taxable year which includes January 1 of the year following the date of enactment of this section--

`(A) the amount taken into account as the net capital gain under subsection (a) shall not exceed the net capital gain determined by only taking into account gains and losses properly taken into account for the portion of the taxable year on or after such January 1, and

`(B) the amount of the net capital gain taken into account in applying section 1(h) for such year shall be reduced by the amount taken into account under subparagraph (A) for such year.

`(2) SPECIAL RULES FOR PASS-THRU ENTITIES-

`(A) IN GENERAL- In applying paragraph (1) with respect to any pass-thru entity, the determination of when gains and losses are properly taken into account shall be made at the entity level.

`(B) PASS-THRU ENTITY DEFINED- For purposes of subparagraph (A), the term `pass-thru entity' means--

`(i) a regulated investment company,

`(ii) a real estate investment trust,

`(iii) an S corporation,

`(iv) a partnership,

`(v) an estate or trust, and

`(vi) a common trust fund.'.

(b) DEDUCTION ALLOWABLE IN COMPUTING ADJUSTED GROSS INCOME- Section 62(a) of such Code (defining adjusted gross income) is amended by inserting after paragraph (18) the following new paragraph:

`(19) LONG-TERM CAPITAL GAINS- The deduction allowed by section 1202.'.

(c) Conforming Amendments-

(1) Section 1 of such Code is amended by striking subsection (h).

(2) Section 170(e)(1) of such Code is amended by striking `the amount of gain' in the material following subparagraph (B)(ii) and inserting `45 percent (50 percent in the case of a corporation) of the amount of gain'.

(3) Section 172(d)(2)(B) of such Code is amended to read as follows:

`(B) the deduction under section 1202 shall not be allowed.'.

(4) The last sentence of section 453A(c)(3) of such Code is amended by striking all that follows `long-term capital gain,' and inserting `the maximum rate on net capital gain under section 1201 or the deduction under section 1202 (whichever is appropriate) shall be taken into account.'.

(5) Section 642(c)(4) of such Code is amended to read as follows:

`(4) ADJUSTMENTS- To the extent that the amount otherwise allowable as a deduction under this subsection consists of gain from the sale or exchange of capital assets held for more than 1 year, proper adjustment shall be made for any deduction allowable to the estate or trust under section 1202 (relating to capital gains deduction). In the case of a trust, the deduction allowed by this subsection shall be subject to section 681 (relating to unrelated business income).'.

(6) The last sentence of section 643(a)(3) of such Code is amended to read as follows: `The deduction under section 1202 (relating to capital gains deduction) shall not be taken into account.'.

(7) Section 643(a)(6)(C) of such Code is amended by inserting `(i)' before `there shall' and by inserting before the period `, and (ii) the deduction under section 1202 (relating to capital gains deduction) shall not be taken into account'.

(8)(A) Section 904(b)(2) of such Code is amended by striking subparagraph (A), by redesignating subparagraph (B) as subparagraph (A), and by inserting after subparagraph (A) (as so redesignated) the following:

`(B) OTHER TAXPAYERS- In the case of a taxpayer other than a corporation, taxable income from sources outside the United States shall include gain from the sale or exchange of capital assets only to the extent of foreign source capital gain net income.'.

(B) Section 904(b)(2)(A) of such Code, as so redesignated, is amended--

(i) by striking all that precedes clause (i) and inserting the following:

`(A) CORPORATIONS- In the case of a corporation--', and

(ii) in clause (i), by striking `in lieu of applying subparagraph (A),'.

(C) Section 904(b)(3) of such Code is amended by striking subparagraphs (D) and (E) and inserting the following:

`(D) RATE DIFFERENTIAL PORTION- The rate differential portion of foreign source net capital gain, net capital gain, or the excess of 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 capital 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 before 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 extent such amount exceeds the total of any capital gain net income (determined without regard to this subsection) for taxable years beginning after December 31, 2003.'.

(11) Section 1402(i)(1) of such Code is amended by inserting `, and the deduction provided by section 1202 shall not apply' before the period at the end thereof.

(12) Section 1445(e) of such Code is amended--

(A) in paragraph (1), by striking `35 percent (or, to the extent provided in regulations, 20 percent)' and inserting `17.5 percent (or, to the extent provided in regulation, 15.6 percent)', and

(B) in paragraph (2), by striking `35 percent' 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 applies', 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 chapter 1 of such Code is amended to read as follows:

`Sec. 1202. Capital gains deduction.'.

(d) Effective Dates-

(1) IN GENERAL- Except as otherwise provided in this subsection, the amendments, made by this section apply to taxable years ending after December 31 of the year which includes the date of enactment of this Act.

(2) REPEAL OF SECTION 1(h)- The amendment 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 enactment of this Act.

(4) USE OF LONG-TERM LOSSES- The amendments 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 enactment of this Act.

SEC. 3. 55-PERCENT EXCLUSION OF DIVIDEND INCOME FROM TAX.

(a) IN GENERAL- Part III of subchapter B of chapter 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 RECEIVED BY INDIVIDUALS.

`(a) EXCLUSION FROM GROSS INCOME- Gross income 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., organization) or section 521 (relating to farmers' cooperative associations).

`(c) SPECIAL RULES- For purposes of this section--

`(1) EXCLUSION NOT TO APPLY TO CAPITAL GAIN DIVIDENDS FROM REGULATED INVESTMENT COMPANIES AND REAL ESTATE INVESTMENT TRUSTS-

`(2) CERTAIN NONRESIDENT ALIENS INELIGIBLE FOR EXCLUSION- In the case of a nonresident 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 effectively 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 OWNERSHIP 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 paragraph (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 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 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 paragraph (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 RECEIVED FROM REAL ESTATE INVESTMENT TRUSTS-

`(1) TREATMENT FOR SECTION 116- For purposes of section 116 (relating to partial exclusion of dividends received by individuals), a capital gain dividend (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 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 as a dividend.'

(6) The table of sections for part III of subchapter 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 individuals.'

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years ending after December 31 of the year which includes the date of enactment of this Act.

END