Page:United States Statutes at Large Volume 90 Part 2.djvu/463

 PUBLIC LAW 94-455—OCT. 4, 1976

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90 STAT. 1931

" (D) the deduction for dividends paid (as defined in section 561) shall be allowed, but shall be computed without regard to capital gain dividends and exempt-interest dividends." (c) E X E M P T - I N T E R E S T

DIVIDENDS.—Section

852(b)

(relating

to

26 USC 852.

method of taxation of regulated investment companies and shareholders) is amended by inserting after paragraph (4) the following new paragraph (5): " (5) EXEMPT-INTEREST DIVIDENDS.—If, at the close of each quar-

ter of its taxable year, at least 50 percent of the value (as defined in section 851(c)(4)) of the total assets of the regulated investment company consists of obligations described in section 103 (a)(1), such company shall be qualified to pay exempt-interest dividends, as defined herein, to its shareholders. " (A) DEFINITION. — A n exempt-interest dividend means any dividend or part thereof (other than a capital gain dividend) paid by a regulated investment company and des;.,, ignated by it as an exempt-interest dividend in a written notice mailed to its shareholders not later than 45 days after the close of its taxable year. I f the aggregate amount so designated with respect to a taxable year of the company (including exempt-interest dividends paid after the close of the taxable year as described in section 855) is greater than the excess of— " (i) the amount of interest excludable from gross income under section 1 0 3 (a)(1), over " ( i i) the amounts disallowed as deductions under sections 265 and l 7 l (a)(2), the portion of such distribution which shall constitute a n exempt-interest dividend shall be only that proportion of the amount so designated as the amount of such excess for such taxable year bears to the amount so designated. "(B)

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TREATMENT o r EXEMPT-INTEREST DIVIDENDS BY SHARE-

HOLDERS.—An exempt-interest dividend shall be treated by the shareholders for all purposes of this subtitle as an item of interest excludable from gross income under section 103(a) (1). Such purposes include but are not limited to— " (i) the determination of gross income and taxable income, " ( i i) the determination of distributable net income under subchapter J, " ( i i i) the allowance of, or calculation of the amount of, any credit or deduction, and " ( i v) the determination of the basis in the hands of any shareholder- of any share of stock of the company." (d) TECHNICAL AMENDMENT. — S e c t i o n 1 0 3 (g), as redesignated by

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26 USC 103.

section 1305 of this Act (relating to exclusions from gross income of interest on certain government obligations) is amended by inserting after paragraph (23) the following new paragraph: "(24) Exempt-interest dividends.—For treatment of exempt-interest dividends, see section 852(b)(5)(B)." (e) DISALLOWANCE OF DEDUCTIONS.—Section 265 ( r e l a t i n g to non-

allowance of deductions for expenses and interest relating to tax exempt income) is amended by a d d i n g a t the end thereof the following new paragraph s:

' ' 26 USC 265.

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