text: 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.
target: Amends the Internal Revenue Code to provide that dividend income shall be taxed as net capital gain.
feat_title: A bill to amend the Internal Revenue Code of 1986 to provide that dividend income of individuals not be taxed at rates in excess of the maximum capital gains rate.