< Back to H.R. 5124 (103rd Congress, 1993–1994)

Text of To amend the Internal Revenue Code of 1986 to limit the interest deduction allowed corporations and to allow a deduction ...

...allow a deduction for dividends paid by corporations.

This bill was introduced on September 28, 1994, in a previous session of Congress, but was not enacted. The text of the bill below is as of Sep 28, 1994 (Introduced).

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HR 5124 IH

103d CONGRESS

2d Session

H. R. 5124

To amend the Internal Revenue Code of 1986 to limit the interest deduction allowed corporations and to allow a deduction for dividends paid by corporations.

IN THE HOUSE OF REPRESENTATIVES

September 28, 1994

Mr. REYNOLDS introduced the following bill; which was referred to the Committee on Ways and Means


A BILL

To amend the Internal Revenue Code of 1986 to limit the interest deduction allowed corporations and to allow a deduction for dividends paid by corporations.

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

SECTION 1. LIMITATION ON INTEREST DEDUCTION ALLOWED CORPORATIONS.

    (a) IN GENERAL- Section 163 of the Internal Revenue Code of 1986 (relating to deduction for interest) is amended by redesignating subsection (k) as subsection (l) and by inserting after subsection (j) the following new subsection:

    ‘(k) Limitation on Corporate Interest Payments-

      ‘(1) IN GENERAL- Except as provided in paragraph (2), in the case of a corporation, the amount otherwise allowed as a deduction under this chapter for interest paid or accrued during the taxable year by such corporation shall be reduced by 20 percent.

      ‘(2) Exception for certain corporations-

        ‘(A) IN GENERAL- Paragraph (1) shall not apply for any taxable year to any corporation the earnings and profits of which for such taxable year (computed as of the close of the taxable year without diminution by reason of any dividend distributions made during such taxable year) do not exceed the lesser of--

          ‘(i) the corporation’s tax liability under this chapter for such taxable year (determined after the application of paragraph (1)), or

          ‘(ii) $100,000.

        ‘(B) CONTROLLED GROUP- For purposes of subparagraph (A), all component members of a controlled group (as defined in section 179(d)(7)) shall be treated as 1 corporation.

      ‘(3) EXCEPTION FOR FARMING BUSINESSES- Paragraph (1) shall not apply to any corporation substantially all of the assets of which are used in the active conduct of a farming business (as defined in section 448(d)(1)).’.

    (b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 1993.

SEC. 2. DIVIDEND PAID DEDUCTION.

    (a) GENERAL RULE- Part VIII of subchapter B of chapter 1 of the Internal Revenue Code of 1986 (relating to special deductions for corporations) is amended by striking the table of sections and section 241 and inserting the following:

‘Subpart A. Dividend paid deduction.

‘Subpart B. Dividend received deduction.

‘Subpart C. Miscellaneous provisions.

‘SEC. 230. ALLOWANCE OF SPECIAL DEDUCTIONS.

    ‘In addition to the deductions provided in part VI (section 161 and following), there shall be allowed as deductions in computing taxable income the items specified in this part.

‘Subpart A--Dividend Paid Deduction

‘Sec. 231. Dividend paid deduction.

‘Sec. 232. Qualified dividend account.

‘Sec. 233. Ineligible corporations.

‘Sec. 234. Special rules.

‘SEC. 231. DIVIDEND PAID DEDUCTION.

    ‘(a) ALLOWANCE OF DEDUCTION- In the case of a corporation, there shall be allowed as a deduction an amount equal to 50 percent of the dividends paid by such corporation during the taxable year.

    ‘(b) LIMITATION BASED ON AMOUNT IN QUALIFIED DIVIDEND ACCOUNT- The amount of the dividends paid during any taxable year which may be taken into account under subsection (a) shall not exceed the amount in the corporation’s qualified dividend account as of the close of such taxable year determined after the application of section 232(b)(1) for the taxable year but before the application of section 232(b)(2) for such taxable year.

‘SEC. 232. QUALIFIED DIVIDEND ACCOUNT.

    ‘(a) ESTABLISHMENT OF ACCOUNT- Each corporation shall establish a qualified dividend account. The opening balance of such account shall be zero.

    ‘(b) ADJUSTMENTS TO ACCOUNTS- As of the close of each taxable year beginning after January 1, 1993, the qualified dividend account--

      ‘(1) shall be increased by the adjusted taxable income of the corporation for the taxable year, and

      ‘(2) shall be reduced by the amount of the dividends paid by the corporation during the taxable year to the extent the amount so paid does not exceed the limitation of section 231(c).

    ‘(c) ADJUSTED TAXABLE INCOME- For purposes of this section--

      ‘(1) IN GENERAL- The term ‘adjusted taxable income’ means taxable income adjusted as provided in this subsection.

      ‘(2) ADJUSTMENT FOR CERTAIN QUALIFYING DIVIDENDS- Taxable income shall be increased by the deduction allowed under section 243 with respect to that portion of any qualifying dividend (as defined in section 243(b)(1)) for which such deduction is determined at a rate of less than 100 percent. Similar rules shall apply in the case of dividends for which deductions are allowable under section 245(b).

      ‘(3) Adjustment for tax credits-

        ‘(A) IN GENERAL- Taxable income shall be reduced by the deduction equivalent of the tentative nonrefundable credits for the taxable year.

        ‘(B) DEDUCTION EQUIVALENT- For purposes of subparagraph (A), the deduction equivalent of the tentative nonrefundable credits for any taxable year is the amount which (if allowed as a deduction for the taxable year) would reduce the tax liability (as defined in section 26(b)) for the taxable year by an amount equal to the tentative nonrefundable credits.

        ‘(C) TENTATIVE NONREFUNDABLE CREDITS- For purposes of this paragraph, the term ‘tentative nonrefundable credits’ means the amount of the credits which would have been allowable under part IV of subchapter A of this chapter for the taxable year (other than the credit allowable under section 34) if no deduction were allowable under section 231.

      ‘(4) ADJUSTMENT FOR CORPORATE MINIMUM TAX- If tax is imposed by section 55 on the corporation for any taxable year, taxable income for the succeeding taxable year shall be increased by an amount equal to 35/100 of the amount of tax so imposed.

      ‘(5) DIVIDEND PAID DEDUCTION NOT TAKEN INTO ACCOUNT- Taxable income shall be determined without regard to the deduction allowed under section 231.

‘SEC. 233. INELIGIBLE CORPORATIONS.

    ‘(a) GENERAL RULE- No deduction shall be allowed under section 231 with respect to any dividend paid by--

      ‘(1) a regulated investment company,

      ‘(2) a real estate investment trust,

      ‘(3) an S corporation,

      ‘(4) any organization taxable under subchapter T of this chapter (relating to cooperative organizations), or

      ‘(5) a FSC or DISC.

    ‘(b) FOREIGN CORPORATIONS- In the case of a foreign corporation--

      ‘(1) no deduction shall be allowed under section 231 for dividends paid by such corporation during any taxable year unless the corporation meets the requirements of section 245(a) for such taxable year,

      ‘(2) only adjusted taxable income effectively connected with the conduct of a trade or business in the United States and attributable to the uninterrupted period referred to in section 245(a) shall be added to the qualified dividend account, and

      ‘(3) any distribution shall be treated as made ratably out of income effectively connected with the conduct of a trade or business in the United States and other income.

‘SEC. 234. SPECIAL RULES.

    ‘(a) CERTAIN DISTRIBUTIONS NOT TREATED AS DIVIDENDS- For purposes of this subpart, the term ‘dividend’ does not include--

      ‘(1) any distribution in redemption of stock, in liquidation, or in a reorganization (whether or not such distribution is treated as a distribution to which section 301 applies), and

      ‘(2) any dividend described in section 244 (relating to dividends received on certain preferred stock).

    ‘(b) DEDUCTION NOT TAKEN INTO ACCOUNT FOR PURPOSES OF CERTAIN LIMITATIONS BASED ON TAXABLE INCOME- For purposes of sections 246(c), 613, 613A, and 593, taxable income shall be determined without regard to the deduction allowed under section 231.

    ‘(c) TREATMENT OF DIVIDENDS RECEIVED BY 5-Percent Tax-Exempt Shareholders-

      ‘(1) IN GENERAL- For purposes of part III of subchapter F (relating to taxation of unrelated business income of certain exempt organizations), any dividend received by a tax-exempt organization from a corporation in which such organization is a 5-percent shareholder shall be treated as unrelated business taxable income to the extent of the amount of the deduction allowable under section 231 to such corporation with respect to such dividend. Except as provided in regulations, the amount of such deduction shall be determined on the basis of the return filed by the corporation for the taxable year.

      ‘(2) DEFINITIONS- For purposes of this subsection--

        ‘(A) 5-PERCENT SHAREHOLDER- The term ‘5-percent shareholder’ means any tax-exempt organization which owns (or is considered as owning within the meaning of section 318)--

          ‘(i) 5 percent or more (by value) of the outstanding stock of the corporation, or

          ‘(ii) stock possessing 5 percent or more of the total combined voting power of all stock of the corporation.

        ‘(B) TAX-EXEMPT ORGANIZATION- The term ‘tax-exempt organization’ means any organization which is exempt from the tax imposed by this chapter.

        ‘(C) RELATED ENTITIES- A tax-exempt organization and 1 or more other tax-exempt organizations which have--

          ‘(i) significant common purposes and substantial common membership, or

          ‘(ii) directly or indirectly substantial common direction or control, shall be treated as 1 tax-exempt organization for purposes of this paragraph.

    ‘(d) TREATMENT OF SUBSEQUENT ADJUSTMENTS- If there is any adjustment which affects the amount of the adjusted taxable income of a corporation for any taxable year (whether by reason of any carryback to such taxable year or otherwise) for purposes of this subpart and subpart B, the amount of such adjustment shall be treated as made as of the close of such taxable year.

    ‘(e) ALLOCATION OF QUALIFIED DIVIDEND ACCOUNT IN CORPORATE SEPARATIONS, REORGANIZATIONS, AND REDEMPTIONS- Adjustments similar to the adjustments provided in subsection (h) or (n)(7) of section 312 shall be made to the qualified dividend account in the case of a transaction described in either of such subsections.

    ‘(f) Mutual Life Insurance Companies-

      ‘(1) GENERAL RULE- In the case of a mutual life insurance company, for purposes of this subpart, 80 percent of the differential earnings amount (as defined in section 809(a)(3)) shall be treated as a dividend paid to a shareholder.

      ‘(2) REGULATIONS- The Secretary may prescribe regulations applying rules consistent with this subpart to mutual life insurance companies. Such regulations may include rules treating an appropriate portion of the recomputed differential earnings amount (as defined in section 809(f)(3)) as an adjustment to the amount described in paragraph (1).

‘Subpart B--Dividend Received Deduction

‘Sec. 243. Dividends received by corporations.

‘Sec. 244. Dividends received on certain preferred stock.

‘Sec. 245. Dividends received from certain foreign corporations.

‘Sec. 246. Rules applying to deductions for dividends received.

‘Sec. 246A. Dividends received deduction reduced where portfolio stock is debt financed.

‘Sec. 247. Dividends paid on certain preferred stock of public utilities.’.

    (b) Compensatory Withholding Tax on Dividends Paid to Nonresident Aliens or Foreign Corporations-

      (1) GENERAL RULE- Subpart D of part II of subchapter N of chapter 1 (relating to miscellaneous provisions) is amended by adding at the end thereof the following new section:

‘SEC. 899. ADDITIONAL TAX ON DIVIDENDS TO REFLECT DIVIDEND PAID DEDUCTION.

    ‘(a) GENERAL RULE- In addition to any tax imposed by section 871 or 881, there is hereby imposed a tax equal to 30.4 percent of the dividends received from sources within the United States by a nonresident alien individual or foreign corporation.

    ‘(b) TAX NOT TO APPLY TO SHAREHOLDER’S EFFECTIVELY CONNECTED ITEMS- The tax imposed by this section shall not apply to any dividend to the extent such dividend is effectively connected with the conduct of a trade or business by the shareholder within the United States.

    ‘(c) CORRESPONDING INCREASE IN WITHHOLDING TAX- In the case of any dividend subject to tax under subsection (a), the tax imposed by section 1441 or 1442 (as the case may be) shall be increased by an amount equal to the applicable percentage of such dividend.

    ‘(d) EXCEPTION FOR CERTAIN TREATY COUNTRIES- The tax imposed by subsection (a) shall not apply to any dividend paid to a resident or corporation of a foreign country during any period--

      ‘(1) in which an income tax treaty between such country and the United States is in effect, and

      ‘(2) during which there is in effect a certification by the Secretary that--

        ‘(A) such income tax treaty has adequate provisions to prevent treaty shopping, and

        ‘(B) if such foreign country imposes an income tax comparable to the tax imposed by this subtitle and grants relief from such tax to its residents, such country grants relief equivalent to that provided in section 231 with respect to dividends paid to United States persons.

    The requirements of paragraph (2) shall not apply to dividends paid before January 1, 1994.’.

      (2) CLERICAL AMENDMENT- The table of sections for subpart D of part II of subchapter N of chapter 1 is amended by adding at the end thereof the following new item:

‘Sec. 899. Additional tax on dividends to reflect dividend paid deduction.’.

    (c) SECTION 381 TO APPLY TO QUALIFIED DIVIDEND ACCOUNT- Subsection (c) of section 381 (relating to items of the distributor or transferor corporation) is amended by adding at the end thereof the following new paragraph:

      ‘(27) QUALIFIED DIVIDEND ACCOUNT- Under regulations prescribed by the Secretary, the acquiring corporation shall take into account (to the extent proper to carry out the purposes of this section and subpart A of part VIII of subchapter B of this chapter) the qualified dividend account of the distributor or transferor corporation.’.

    (d) CLERICAL AMENDMENT- Part VIII of subchapter B of chapter 1 is amended by inserting after section 247 the following:

‘Subpart C--Miscellaneous Provisions

‘Sec. 248. Organizational expenditures.

‘Sec. 249. Limitation on deduction of bond premium on repurchase.’.