article: 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.