[Congressional Bills 111th Congress]
[From the U.S. Government Publishing Office]
[S. 3948 Introduced in Senate (IS)]

111th CONGRESS
  2d Session
                                S. 3948

  To amend the Internal Revenue Code of 1986 to modify certain rules 
 applicable to regulated investment companies, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                           November 17, 2010

  Mr. Bingaman (for himself, Mr. Crapo, and Mr. Kerry) introduced the 
 following bill; which was read twice and referred to the Committee on 
                                Finance

_______________________________________________________________________

                                 A BILL


 
  To amend the Internal Revenue Code of 1986 to modify certain rules 
 applicable to regulated investment companies, 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, ETC.

    (a) Short Title.--This Act may be cited as the ``Regulated 
Investment Company Modernization Act of 2010''.
    (b) Reference.--Except as otherwise expressly provided, whenever in 
this Act an amendment or repeal is expressed in terms of an amendment 
to, or repeal of, a section or other provision, the reference shall be 
considered to be made to a section or other provision of the Internal 
Revenue Code of 1986.
    (c) Table of Contents.--The table of contents for this Act is as 
follows:

Sec. 1. Short title, etc.
   TITLE I--CAPITAL LOSS CARRYOVERS OF REGULATED INVESTMENT COMPANIES

Sec. 101. Capital loss carryovers of regulated investment companies.
  TITLE II--MODIFICATION OF GROSS INCOME AND ASSET TESTS OF REGULATED 
                          INVESTMENT COMPANIES

Sec. 201. Income from commodities counted toward gross income test of 
                            regulated investment companies.
Sec. 202. Savings provisions for failures of regulated investment 
                            companies to satisfy gross income and asset 
                            tests.
    TITLE III--MODIFICATION OF RULES RELATED TO DIVIDENDS AND OTHER 
                             DISTRIBUTIONS

Sec. 301. Modification of dividend designation requirements and 
                            allocation rules for regulated investment 
                            companies.
Sec. 302. Earnings and profits of regulated investment companies.
Sec. 303. Pass-thru of exempt-interest dividends and foreign tax 
                            credits in fund of funds structure.
Sec. 304. Modification of rules for spillover dividends of regulated 
                            investment companies.
Sec. 305. Return of capital distributions of regulated investment 
                            companies.
Sec. 306. Distributions in redemption of stock of a regulated 
                            investment company.
Sec. 307. Repeal of preferential dividend rule for publicly offered 
                            regulated investment companies.
Sec. 308. Elective deferral of certain late-year losses of regulated 
                            investment companies.
Sec. 309. Exception to holding period requirement for certain regularly 
                            declared exempt-interest dividends.
 TITLE IV--MODIFICATIONS RELATED TO EXCISE TAX APPLICABLE TO REGULATED 
                          INVESTMENT COMPANIES

Sec. 401. Excise tax exemption for certain regulated investment 
                            companies owned by tax exempt entities.
Sec. 402. Deferral of certain gains and losses of regulated investment 
                            companies for excise tax purposes.
Sec. 403. Distributed amount for excise tax purposes determined on 
                            basis of taxes paid by regulated investment 
                            company.
Sec. 404. Increase in required distribution of capital gain net income.
                       TITLE V--OTHER PROVISIONS

Sec. 501. Repeal of assessable penalty with respect to liability for 
                            tax of regulated investment companies.
Sec. 502. Modification of sales load basis deferral rule for regulated 
                            investment companies.

   TITLE I--CAPITAL LOSS CARRYOVERS OF REGULATED INVESTMENT COMPANIES

SEC. 101. CAPITAL LOSS CARRYOVERS OF REGULATED INVESTMENT COMPANIES.

    (a) In General.--Subsection (a) of section 1212 is amended by 
redesignating paragraph (3) as paragraph (4) and by inserting after 
paragraph (2) the following new paragraph:
            ``(3) Regulated investment companies.--
                    ``(A) In general.--If a regulated investment 
                company has a net capital loss for any taxable year--
                            ``(i) paragraph (1) shall not apply to such 
                        loss,
                            ``(ii) the excess of the net short-term 
                        capital loss over the net long-term capital 
                        gain for such year shall be a short-term 
                        capital loss arising on the first day of the 
                        next taxable year, and
                            ``(iii) the excess of the net long-term 
                        capital loss over the net short-term capital 
                        gain for such year shall be a long-term capital 
                        loss arising on the first day of the next 
                        taxable year.
                    ``(B) Coordination with general rule.--If a net 
                capital loss to which paragraph (1) applies is carried 
                over to a taxable year of a regulated investment 
                company--
                            ``(i) Losses to which this paragraph 
                        applies.--Clauses (ii) and (iii) of 
                        subparagraph (A) shall be applied without 
                        regard to any amount treated as a short-term 
                        capital loss under paragraph (1).
                            ``(ii) Losses to which general rule 
                        applies.--Paragraph (1) shall be applied by 
                        substituting `net capital loss for the loss 
                        year or any taxable year thereafter (other than 
                        a net capital loss to which paragraph (3)(A) 
                        applies)' for `net capital loss for the loss 
                        year or any taxable year thereafter'.''.
    (b) Conforming Amendments.--
            (1) Subparagraph (C) of section 1212(a)(1) is amended to 
        read as follows:
                    ``(C) a capital loss carryover to each of the 10 
                taxable years succeeding the loss year, but only to the 
                extent such loss is attributable to a foreign 
                expropriation loss,''.
            (2) Paragraph (10) of section 1222 is amended by striking 
        ``section 1212'' and inserting ``section 1212(a)(1)''.
    (c) Effective Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to net capital 
        losses for taxable years beginning after the date of the 
        enactment of this Act.
            (2) Coordination rules.--Subparagraph (B) of section 
        1212(a)(3) of the Internal Revenue Code of 1986, as added by 
        this section, shall apply to taxable years beginning after the 
        date of the enactment of this Act.

  TITLE II--MODIFICATION OF GROSS INCOME AND ASSET TESTS OF REGULATED 
                          INVESTMENT COMPANIES

SEC. 201. INCOME FROM COMMODITIES COUNTED TOWARD GROSS INCOME TEST OF 
              REGULATED INVESTMENT COMPANIES.

    (a) Gross Income Test.--Subparagraph (A) of section 851(b)(2) is 
amended--
            (1) by striking ``foreign currencies'' and inserting 
        ``commodities'', and
            (2) by striking ``or currencies'' and inserting ``or 
        commodities''.
    (b) Repeal of Regulatory Authority To Exclude Certain Foreign 
Currency Gains From Qualifying Income.--Subsection (b) of section 851 
is amended by striking ``For purposes of paragraph (2), the Secretary 
may by regulation exclude from qualifying income foreign currency gains 
which are not directly related to the company's principal business of 
investing in stock or securities (or options and futures with respect 
to stock or securities).'' in the flush matter after paragraph (3).
    (c) Conforming Amendments.--
            (1) Subsection (h) of section 851 is amended by inserting 
        ``(determined by substituting `foreign currencies' for 
        `commodities' therein)'' after ``subsection (b)(2)(A)''.
            (2) Paragraph (4) of section 7704(d) is amended by 
        inserting ``(determined by substituting `foreign currencies' 
        for `commodities' therein)'' after ``section 851(b)(2)(A)''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

SEC. 202. SAVINGS PROVISIONS FOR FAILURES OF REGULATED INVESTMENT 
              COMPANIES TO SATISFY GROSS INCOME AND ASSET TESTS.

    (a) Asset Test.--Subsection (d) of section 851 is amended--
            (1) by striking ``A corporation which meets'' and inserting 
        the following:
            ``(1) In general.--A corporation which meets'', and
            (2) by adding at the end the following new paragraph:
            ``(2) Special rules regarding failure to satisfy 
        requirements.--If paragraph (1) does not preserve a 
        corporation's status as a regulated investment company for any 
        particular quarter--
                    ``(A) In general.--A corporation that fails to meet 
                the requirements of subsection (b)(3) (other than a 
                failure described in subparagraph (B)(i)) for such 
                quarter shall nevertheless be considered to have 
                satisfied the requirements of such subsection for such 
                quarter if--
                            ``(i) following the corporation's 
                        identification of the failure to satisfy the 
                        requirements of such subsection for such 
                        quarter, a description of each asset that 
                        causes the corporation to fail to satisfy the 
                        requirements of such subsection at the close of 
                        such quarter is set forth in a schedule for 
                        such quarter filed in the manner provided by 
                        the Secretary,
                            ``(ii) the failure to meet the requirements 
                        of such subsection for such quarter is due to 
                        reasonable cause and not due to willful 
                        neglect, and
                            ``(iii)(I) the corporation disposes of the 
                        assets set forth on the schedule specified in 
                        clause (i) within 6 months after the last day 
                        of the quarter in which the corporation's 
                        identification of the failure to satisfy the 
                        requirements of such subsection occurred or 
                        such other time period prescribed by the 
                        Secretary and in the manner prescribed by the 
                        Secretary, or
                            ``(II) the requirements of such subsection 
                        are otherwise met within the time period 
                        specified in subclause (I).
                    ``(B) Rule for certain de minimis failures.--A 
                corporation that fails to meet the requirements of 
                subsection (b)(3) for such quarter shall nevertheless 
                be considered to have satisfied the requirements of 
                such subsection for such quarter if--
                            ``(i) such failure is due to the ownership 
                        of assets the total value of which does not 
                        exceed the lesser of--
                                    ``(I) 1 percent of the total value 
                                of the corporation's assets at the end 
                                of the quarter for which such 
                                measurement is done, or
                                    ``(II) $10,000,000, and
                            ``(ii)(I) the corporation, following the 
                        identification of such failure, disposes of 
                        assets in order to meet the requirements of 
                        such subsection within 6 months after the last 
                        day of the quarter in which the corporation's 
                        identification of the failure to satisfy the 
                        requirements of such subsection occurred or 
                        such other time period prescribed by the 
                        Secretary and in the manner prescribed by the 
                        Secretary, or
                            ``(II) the requirements of such subsection 
                        are otherwise met within the time period 
                        specified in subclause (I).
                    ``(C) Tax.--
                            ``(i) Tax imposed.--If subparagraph (A) 
                        applies to a corporation for any quarter, there 
                        is hereby imposed on such corporation a tax in 
                        an amount equal to the greater of--
                                    ``(I) $50,000, or
                                    ``(II) the amount determined 
                                (pursuant to regulations promulgated by 
                                the Secretary) by multiplying the net 
                                income generated by the assets 
                                described in the schedule specified in 
                                subparagraph (A)(i) for the period 
                                specified in clause (ii) by the highest 
                                rate of tax specified in section 11.
                            ``(ii) Period.--For purposes of clause 
                        (i)(II), the period described in this clause is 
                        the period beginning on the first date that the 
                        failure to satisfy the requirements of 
                        subsection (b)(3) occurs as a result of the 
                        ownership of such assets and ending on the 
                        earlier of the date on which the corporation 
                        disposes of such assets or the end of the first 
                        quarter when there is no longer a failure to 
                        satisfy such subsection.
                            ``(iii) Administrative provisions.--For 
                        purposes of subtitle F, a tax imposed by this 
                        subparagraph shall be treated as an excise tax 
                        with respect to which the deficiency procedures 
                        of such subtitle apply.''.
    (b) Gross Income Test.--Section 851 is amended by adding at the end 
the following new subsection:
    ``(i) Failure To Satisfy Gross Income Test.--
            ``(1) Disclosure requirement.--A corporation that fails to 
        meet the requirement of paragraph (2) of subsection (b) for any 
        taxable year shall nevertheless be considered to have satisfied 
        the requirement of such paragraph for such taxable year if--
                    ``(A) following the corporation's identification of 
                the failure to meet such requirement for such taxable 
                year, a description of each item of its gross income 
                described in such paragraph is set forth in a schedule 
                for such taxable year filed in the manner provided by 
                the Secretary, and
                    ``(B) the failure to meet such requirement is due 
                to reasonable cause and not due to willful neglect.
            ``(2) Imposition of tax on failures.--If paragraph (1) 
        applies to a regulated investment company for any taxable year, 
        there is hereby imposed on such company a tax in an amount 
        equal to the excess of--
                    ``(A) the gross income of such company which is not 
                derived from sources referred to in subsection (b)(2), 
                over
                    ``(B) \1/9\ of the gross income of such company 
                which is derived from such sources.''.
    (c) Deduction of Taxes Paid From Investment Company Taxable 
Income.--Paragraph (2) of section 852(b) is amended by adding at the 
end the following new subparagraph:
                    ``(G) There shall be deducted an amount equal to 
                the tax imposed by subsections (d)(2) and (i) of 
                section 851 for the taxable year.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years with respect to which the due date (determined 
with regard to any extensions) of the return of tax for such taxable 
year is after the date of the enactment of this Act.

    TITLE III--MODIFICATION OF RULES RELATED TO DIVIDENDS AND OTHER 
                             DISTRIBUTIONS

SEC. 301. MODIFICATION OF DIVIDEND DESIGNATION REQUIREMENTS AND 
              ALLOCATION RULES FOR REGULATED INVESTMENT COMPANIES.

    (a) Capital Gain Dividends.--
            (1) In general.--Subparagraph (C) of section 852(b)(3) is 
        amended to read as follows:
                    ``(C) Definition of capital gain dividend.--For 
                purposes of this part--
                            ``(i) In general.--Except as provided in 
                        clause (ii), a capital gain dividend is any 
                        dividend, or part thereof, which is reported by 
                        the company as a capital gain dividend in 
                        written statements furnished to its 
                        shareholders.
                            ``(ii) Excess reported amounts.--If the 
                        aggregate reported amount with respect to the 
                        company for any taxable year exceeds the net 
                        capital gain of the company for such taxable 
                        year, a capital gain dividend is the excess 
                        of--
                                    ``(I) the reported capital gain 
                                dividend amount, over
                                    ``(II) the excess reported amount 
                                which is allocable to such reported 
                                capital gain dividend amount.
                            ``(iii) Allocation of excess reported 
                        amount.--
                                    ``(I) In general.--Except as 
                                provided in subclause (II), the excess 
                                reported amount (if any) which is 
                                allocable to the reported capital gain 
                                dividend amount is that portion of the 
                                excess reported amount which bears the 
                                same ratio to the excess reported 
                                amount as the reported capital gain 
                                dividend amount bears to the aggregate 
                                reported amount.
                                    ``(II) Special rule for noncalendar 
                                year taxpayers.--In the case of any 
                                taxable year which does not begin and 
                                end in the same calendar year, if the 
                                post-December reported amount equals or 
                                exceeds the excess reported amount for 
                                such taxable year, subclause (I) shall 
                                be applied by substituting `post-
                                December reported amount' for 
                                `aggregate reported amount' and no 
                                excess reported amount shall be 
                                allocated to any dividend paid on or 
                                before December 31 of such taxable 
                                year.
                            ``(iv) Definitions.--For purposes of this 
                        subparagraph--
                                    ``(I) Reported capital gain 
                                dividend amount.--The term `reported 
                                capital gain dividend amount' means the 
                                amount reported to its shareholders 
                                under clause (i) as a capital gain 
                                dividend.
                                    ``(II) Excess reported amount.--The 
                                term `excess reported amount' means the 
                                excess of the aggregate reported amount 
                                over the net capital gain of the 
                                company for the taxable year.
                                    ``(III) Aggregate reported 
                                amount.--The term `aggregate reported 
                                amount' means the aggregate amount of 
                                dividends reported by the company under 
                                clause (i) as capital gain dividends 
                                for the taxable year (including capital 
                                gain dividends paid after the close of 
                                the taxable year described in section 
                                855).
                                    ``(IV) Post-december reported 
                                amount.--The term `post-December 
                                reported amount' means the aggregate 
                                reported amount determined by taking 
                                into account only dividends paid after 
                                December 31 of the taxable year.
                            ``(v) Adjustment for determinations.--If 
                        there is an increase in the excess described in 
                        subparagraph (A) for the taxable year which 
                        results from a determination (as defined in 
                        section 860(e)), the company may, subject to 
                        the limitations of this subparagraph, increase 
                        the amount of capital gain dividends reported 
                        under clause (i).
                            ``(vi) Special rule for losses late in the 
                        calendar year.--For special rule for certain 
                        losses after October 31, see paragraph (8).''.
            (2) Conforming amendment.--Subparagraph (B) of section 
        860(f)(2) is amended by inserting ``or reported (as the case 
        may be)'' after ``designated''.
    (b) Exempt-Interest Dividends.--Subparagraph (A) of section 
852(b)(5) is amended to read as follows:
                    ``(A) Definition of exempt-interest dividend.--
                            ``(i) In general.--Except as provided in 
                        clause (ii), an exempt-interest dividend is any 
                        dividend or part thereof (other than a capital 
                        gain dividend) paid by a regulated investment 
                        company and reported by the company as an 
                        exempt-interest dividend in written statements 
                        furnished to its shareholders.
                            ``(ii) Excess reported amounts.--If the 
                        aggregate reported amount with respect to the 
                        company for any taxable year exceeds the exempt 
                        interest of the company for such taxable year, 
                        an exempt-interest dividend is the excess of--
                                    ``(I) the reported exempt-interest 
                                dividend amount, over
                                    ``(II) the excess reported amount 
                                which is allocable to such reported 
                                exempt-interest dividend amount.
                            ``(iii) Allocation of excess reported 
                        amount.--
                                    ``(I) In general.--Except as 
                                provided in subclause (II), the excess 
                                reported amount (if any) which is 
                                allocable to the reported exempt-
                                interest dividend amount is that 
                                portion of the excess reported amount 
                                which bears the same ratio to the 
                                excess reported amount as the reported 
                                exempt-interest dividend amount bears 
                                to the aggregate reported amount.
                                    ``(II) Special rule for noncalendar 
                                year taxpayers.--In the case of any 
                                taxable year which does not begin and 
                                end in the same calendar year, if the 
                                post-December reported amount equals or 
                                exceeds the excess reported amount for 
                                such taxable year, subclause (I) shall 
                                be applied by substituting `post-
                                December reported amount' for 
                                `aggregate reported amount' and no 
                                excess reported amount shall be 
                                allocated to any dividend paid on or 
                                before December 31 of such taxable 
                                year.
                            ``(iv) Definitions.--For purposes of this 
                        subparagraph--
                                    ``(I) Reported exempt-interest 
                                dividend amount.--The term `reported 
                                exempt-interest dividend amount' means 
                                the amount reported to its shareholders 
                                under clause (i) as an exempt-interest 
                                dividend.
                                    ``(II) Excess reported amount.--The 
                                term `excess reported amount' means the 
                                excess of the aggregate reported amount 
                                over the exempt interest of the company 
                                for the taxable year.
                                    ``(III) Aggregate reported 
                                amount.--The term `aggregate reported 
                                amount' means the aggregate amount of 
                                dividends reported by the company under 
                                clause (i) as exempt-interest dividends 
                                for the taxable year (including exempt-
                                interest dividends paid after the close 
                                of the taxable year described in 
                                section 855).
                                    ``(IV) Post-december reported 
                                amount.--The term `post-December 
                                reported amount' means the aggregate 
                                reported amount determined by taking 
                                into account only dividends paid after 
                                December 31 of the taxable year.
                                    ``(V) Exempt interest.--The term 
                                `exempt interest' means, with respect 
                                to any regulated investment company, 
                                the excess of the amount of interest 
                                excludable from gross income under 
                                section 103(a) over the amounts 
                                disallowed as deductions under sections 
                                265 and 171(a)(2).''.
    (c) Foreign Tax Credits.--
            (1) In general.--Subsection (c) of section 853 is amended--
                    (A) by striking ``so designated by the company in a 
                written notice mailed to its shareholders not later 
                than 60 days after the close of the taxable year'' and 
                inserting ``so reported by the company in a written 
                statement furnished to such shareholder'', and
                    (B) by striking ``Notice'' in the heading and 
                inserting ``Statements''.
            (2) Conforming amendments.--Subsection (d) of section 853 
        is amended--
                    (A) by striking ``and the notice to shareholders 
                required by subsection (c)'' in the text thereof, and
                    (B) by striking ``and Notifying Shareholders'' in 
                the heading thereof.
    (d) Credits for Tax Credit Bonds.--
            (1) In general.--Subsection (c) of section 853A is 
        amended--
                    (A) by striking ``so designated by the regulated 
                investment company in a written notice mailed to its 
                shareholders not later than 60 days after the close of 
                its taxable year'' and inserting ``so reported by the 
                regulated investment company in a written statement 
                furnished to such shareholder'', and
                    (B) by striking ``Notice'' in the heading and 
                inserting ``Statements''.
            (2) Conforming amendments.--Subsection (d) of section 853A 
        is amended--
                    (A) by striking ``and the notice to shareholders 
                required by subsection (c)'' in the text thereof, and
                    (B) by striking ``and Notifying Shareholders'' in 
                the heading thereof.
    (e) Dividend Received Deduction, etc.--
            (1) In general.--Paragraph (1) of section 854(b) is 
        amended--
                    (A) by striking ``designated under this 
                subparagraph by the regulated investment company'' in 
                subparagraph (A) and inserting ``reported by the 
                regulated investment company as eligible for such 
                deduction in written statements furnished to its 
                shareholders'',
                    (B) by striking ``designated by the regulated 
                investment company'' in subparagraph (B)(i) and 
                inserting ``reported by the regulated investment 
                company as qualified dividend income in written 
                statements furnished to its shareholders'',
                    (C) by striking ``designated'' in subparagraph 
                (C)(i) and inserting ``reported'', and
                    (D) by striking ``designated'' in subparagraph 
                (C)(ii) and inserting ``reported''.
            (2) Conforming amendments.--Subsection (b) of section 854 
        is amended by striking paragraph (2) and by redesignating 
        paragraphs (3), (4), and (5), as paragraphs (2), (3), and (4), 
        respectively.
    (f) Dividends Paid to Certain Foreign Persons.--
            (1) Interest-related dividends.--Subparagraph (C) of 
        section 871(k)(1) is amended by striking all that precedes 
        ``any taxable year of the company beginning'' and inserting the 
        following:
                    ``(C) Interest-related dividend.--For purposes of 
                this paragraph--
                            ``(i) In general.--Except as provided in 
                        clause (ii), an interest related dividend is 
                        any dividend, or part thereof, which is 
                        reported by the company as an interest related 
                        dividend in written statements furnished to its 
                        shareholders.
                            ``(ii) Excess reported amounts.--If the 
                        aggregate reported amount with respect to the 
                        company for any taxable year exceeds the 
                        qualified net interest income of the company 
                        for such taxable year, an interest related 
                        dividend is the excess of--
                                    ``(I) the reported interest related 
                                dividend amount, over
                                    ``(II) the excess reported amount 
                                which is allocable to such reported 
                                interest related dividend amount.
                            ``(iii) Allocation of excess reported 
                        amount.--
                                    ``(I) In general.--Except as 
                                provided in subclause (II), the excess 
                                reported amount (if any) which is 
                                allocable to the reported interest 
                                related dividend amount is that portion 
                                of the excess reported amount which 
                                bears the same ratio to the excess 
                                reported amount as the reported 
                                interest related dividend amount bears 
                                to the aggregate reported amount.
                                    ``(II) Special rule for noncalendar 
                                year taxpayers.--In the case of any 
                                taxable year which does not begin and 
                                end in the same calendar year, if the 
                                post-December reported amount equals or 
                                exceeds the excess reported amount for 
                                such taxable year, subclause (I) shall 
                                be applied by substituting `post-
                                December reported amount' for 
                                `aggregate reported amount' and no 
                                excess reported amount shall be 
                                allocated to any dividend paid on or 
                                before December 31 of such taxable 
                                year.
                            ``(iv) Definitions.--For purposes of this 
                        subparagraph--
                                    ``(I) Reported interest related 
                                dividend amount.--The term `reported 
                                interest related dividend amount' means 
                                the amount reported to its shareholders 
                                under clause (i) as an interest related 
                                dividend.
                                    ``(II) Excess reported amount.--The 
                                term `excess reported amount' means the 
                                excess of the aggregate reported amount 
                                over the qualified net interest income 
                                of the company for the taxable year.
                                    ``(III) Aggregate reported 
                                amount.--The term `aggregate reported 
                                amount' means the aggregate amount of 
                                dividends reported by the company under 
                                clause (i) as interest related 
                                dividends for the taxable year 
                                (including interest related dividends 
                                paid after the close of the taxable 
                                year described in section 855).
                                    ``(IV) Post-december reported 
                                amount.--The term `post-December 
                                reported amount' means the aggregate 
                                reported amount determined by taking 
                                into account only dividends paid after 
                                December 31 of the taxable year.
                            ``(v) Termination.--The term `interest 
                        related dividend' shall not include any 
                        dividend with respect to''.
            (2) Short-term capital gain dividends.--Subparagraph (C) of 
        section 871(k)(2) is amended by striking all that precedes 
        ``any taxable year of the company beginning'' and inserting the 
        following:
                    ``(C) Short-term capital gain dividend.--For 
                purposes of this paragraph--
                            ``(i) In general.--Except as provided in 
                        clause (ii), the term `short-term capital gain 
                        dividend' means any dividend, or part thereof, 
                        which is reported by the company as a short-
                        term capital gain dividend in written 
                        statements furnished to its shareholders.
                            ``(ii) Excess reported amounts.--If the 
                        aggregate reported amount with respect to the 
                        company for any taxable year exceeds the 
                        qualified short-term gain of the company for 
                        such taxable year, the term `short-term capital 
                        gain dividend' means the excess of--
                                    ``(I) the reported short-term 
                                capital gain dividend amount, over
                                    ``(II) the excess reported amount 
                                which is allocable to such reported 
                                short-term capital gain dividend 
                                amount.
                            ``(iii) Allocation of excess reported 
                        amount.--
                                    ``(I) In general.--Except as 
                                provided in subclause (II), the excess 
                                reported amount (if any) which is 
                                allocable to the reported short-term 
                                capital gain dividend amount is that 
                                portion of the excess reported amount 
                                which bears the same ratio to the 
                                excess reported amount as the reported 
                                short-term capital gain dividend amount 
                                bears to the aggregate reported amount.
                                    ``(II) Special rule for noncalendar 
                                year taxpayers.--In the case of any 
                                taxable year which does not begin and 
                                end in the same calendar year, if the 
                                post-December reported amount equals or 
                                exceeds the excess reported amount for 
                                such taxable year, subclause (I) shall 
                                be applied by substituting `post-
                                December reported amount' for 
                                `aggregate reported amount' and no 
                                excess reported amount shall be 
                                allocated to any dividend paid on or 
                                before December 31 of such taxable 
                                year.
                            ``(iv) Definitions.--For purposes of this 
                        subparagraph--
                                    ``(I) Reported short-term capital 
                                gain dividend amount.--The term 
                                `reported short-term capital gain 
                                dividend amount' means the amount 
                                reported to its shareholders under 
                                clause (i) as a short-term capital gain 
                                dividend.
                                    ``(II) Excess reported amount.--The 
                                term `excess reported amount' means the 
                                excess of the aggregate reported amount 
                                over the qualified short-term gain of 
                                the company for the taxable year.
                                    ``(III) Aggregate reported 
                                amount.--The term `aggregate reported 
                                amount' means the aggregate amount of 
                                dividends reported by the company under 
                                clause (i) as short-term capital gain 
                                dividends for the taxable year 
                                (including short-term capital gain 
                                dividends paid after the close of the 
                                taxable year described in section 855).
                                    ``(IV) Post-december reported 
                                amount.--The term `post-December 
                                reported amount' means the aggregate 
                                reported amount determined by taking 
                                into account only dividends paid after 
                                December 31 of the taxable year.
                            ``(v) Termination.--The term `short-term 
                        capital gain dividend' shall not include any 
                        dividend with respect to''.
    (g) Conforming Amendments.--Section 855 is amended--
            (1) by striking subsection (c) and redesignating subsection 
        (d) as subsection (c), and
            (2) by striking ``, (c) and (d)'' in subsection (a) and 
        inserting ``and (c)''.
    (h) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.
    (i) Application of JGTRRA Sunset.--Section 303 of the Jobs and 
Growth Tax Relief Reconciliation Act of 2003 shall apply to the 
amendments made by subparagraphs (B) and (D) of subsection (e)(1) to 
the same extent and in the same manner as section 303 of such Act 
applies to the amendments made by section 302 of such Act.

SEC. 302. EARNINGS AND PROFITS OF REGULATED INVESTMENT COMPANIES.

    (a) In General.--Paragraph (1) of section 852(c) is amended to read 
as follows:
            ``(1) Treatment of nondeductible items.--
                    ``(A) Net capital loss.--If a regulated investment 
                company has a net capital loss for any taxable year--
                            ``(i) such net capital loss shall not be 
                        taken into account for purposes of determining 
                        the company's earnings and profits, and
                            ``(ii) any capital loss arising on the 
                        first day of the next taxable year by reason of 
                        clause (ii) or (iii) of section 1212(a)(3)(A) 
                        shall be treated as so arising for purposes of 
                        determining earnings and profits.
                    ``(B) Other nondeductible items.--
                            ``(i) In general.--The earnings and profits 
                        of a regulated investment company for any 
                        taxable year (but not its accumulated earnings 
                        and profits) shall not be reduced by any amount 
                        which is not allowable as a deduction (other 
                        than by reason of section 265 or 171(a)(2)) in 
                        computing its taxable income for such taxable 
                        year.
                            ``(ii) Coordination with treatment of net 
                        capital losses.--Clause (i) shall not apply to 
                        a net capital loss to which subparagraph (A) 
                        applies.''.
    (b) Conforming Amendments.--
            (1) Subsection (c) of section 852 is amended by adding at 
        the end the following new paragraph:
            ``(4) Regulated investment company.--For purposes of this 
        subsection, the term `regulated investment company' includes a 
        domestic corporation which is a regulated investment company 
        determined without regard to the requirements of subsection 
        (a).''.
            (2) Paragraphs (1)(A) and (2)(A) of section 871(k) are each 
        amended by inserting ``which meets the requirements of section 
        852(a) for the taxable year with respect to which the dividend 
        is paid'' before the period at the end.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

SEC. 303. PASS-THRU OF EXEMPT-INTEREST DIVIDENDS AND FOREIGN TAX 
              CREDITS IN FUND OF FUNDS STRUCTURE.

    (a) In General.--Section 852 is amended by adding at the end the 
following new subsection:
    ``(g) Special Rules for Fund of Funds.--
            ``(1) In general.--In the case of a qualified fund of 
        funds--
                    ``(A) such fund shall be qualified to pay exempt-
                interest dividends to its shareholders without regard 
                to whether such fund satisfies the requirements of the 
                first sentence of subsection (b)(5), and
                    ``(B) such fund may elect the application of 
                section 853 (relating to foreign tax credit allowed to 
                shareholders) without regard to the requirement of 
                subsection (a)(1) thereof.
            ``(2) Qualified fund of funds.--For purposes of this 
        subsection, the term `qualified fund of funds' means a 
        regulated investment company if (at the close of each quarter 
        of the taxable year) at least 50 percent of the value of its 
        total assets is represented by interests in other regulated 
        investment companies.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after the date of the enactment of this Act.

SEC. 304. MODIFICATION OF RULES FOR SPILLOVER DIVIDENDS OF REGULATED 
              INVESTMENT COMPANIES.

    (a) Deadline for Declaration of Dividend.--Paragraph (1) of section 
855(a) is amended to read as follows:
            ``(1) declares a dividend before the later of--
                    ``(A) the 15th day of the 9th month following the 
                close of the taxable year, or
                    ``(B) in the case of an extension of time for 
                filing the company's return for the taxable year, the 
                due date for filing such return taking into account 
                such extension, and''.
    (b) Deadline for Distribution of Dividend.--Paragraph (2) of 
section 855(a) is amended by striking ``the first regular dividend 
payment'' and inserting ``the first dividend payment of the same type 
of dividend''.
    (c) Short-Term Capital Gain.--Subsection (a) of section 855 is 
amended by adding at the end the following: ``For purposes of paragraph 
(2), a dividend attributable to any short-term capital gain with 
respect to which a notice is required under the Investment Company Act 
of 1940 shall be treated as the same type of dividend as a capital gain 
dividend.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to distributions in taxable years beginning after the date of the 
enactment of this Act.

SEC. 305. RETURN OF CAPITAL DISTRIBUTIONS OF REGULATED INVESTMENT 
              COMPANIES.

    (a) In General.--Subsection (b) of section 316 is amended by adding 
at the end the following new paragraph:
            ``(4) Certain distributions by regulated investment 
        companies in excess of earnings and profits.--In the case of a 
        regulated investment company that has a taxable year other than 
        a calendar year, if the distributions by the company with 
        respect to any class of stock of such company for the taxable 
        year exceed the company's current and accumulated earnings and 
        profits which may be used for the payment of dividends on such 
        class of stock, the company's current earnings and profits 
        shall, for purposes of subsection (a), be allocated first to 
        distributions with respect to such class of stock made during 
        the portion of the taxable year which precedes January 1.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to distributions made in taxable years beginning after the date of the 
enactment of this Act.

SEC. 306. DISTRIBUTIONS IN REDEMPTION OF STOCK OF A REGULATED 
              INVESTMENT COMPANY.

    (a) Redemptions Treated as Exchanges.--
            (1) In general.--Subsection (b) of section 302 is amended 
        by redesignating paragraph (5) as paragraph (6) and by 
        inserting after paragraph (4) the following new paragraph:
            ``(5) Redemptions by certain regulated investment 
        companies.--Except to the extent provided in regulations 
        prescribed by the Secretary, subsection (a) shall apply to any 
        distribution in redemption of stock of a publicly offered 
        regulated investment company (within the meaning of section 
        67(c)(2)(B)) if--
                    ``(A) such redemption is upon the demand of the 
                stockholder, and
                    ``(B) such company issues only stock which is 
                redeemable upon the demand of the stockholder.''.
            (2) Conforming amendment.--Subsection (a) of section 302 is 
        amended by striking ``or (4)'' and inserting ``(4), or (5)''.
    (b) Losses on Redemptions Not Disallowed for Fund-of-Funds 
Regulated Investment Companies.--Paragraph (3) of section 267(f) is 
amended by adding at the end the following new subparagraph:
                    ``(D) Redemptions by fund-of-funds regulated 
                investment companies.--Except to the extent provided in 
                regulations prescribed by the Secretary, subsection 
                (a)(1) shall not apply to any distribution in 
                redemption of stock of a regulated investment company 
                if--
                            ``(i) such company issues only stock which 
                        is redeemable upon the demand of the 
                        stockholder, and
                            ``(ii) such redemption is upon the demand 
                        of another regulated investment company.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to distributions after the date of the enactment of this Act.

SEC. 307. REPEAL OF PREFERENTIAL DIVIDEND RULE FOR PUBLICLY OFFERED 
              REGULATED INVESTMENT COMPANIES.

    (a) In General.--Subsection (c) of section 562 is amended by 
striking ``The amount'' and inserting ``Except in the case of a 
publicly offered regulated investment company (as defined in section 
67(c)(2)(B)), the amount''.
    (b) Conforming Amendment.--Section 562(c) is amended by inserting 
``(other than a publicly offered regulated investment company (as so 
defined))'' after ``regulated investment company'' in the second 
sentence thereof.
    (c) Effective Date.--The amendments made by this section shall 
apply to distributions in taxable years beginning after the date of the 
enactment of this Act.

SEC. 308. ELECTIVE DEFERRAL OF CERTAIN LATE-YEAR LOSSES OF REGULATED 
              INVESTMENT COMPANIES.

    (a) In General.--Paragraph (8) of section 852(b) is amended to read 
as follows:
            ``(8) Elective deferral of certain late-year losses.--
                    ``(A) In general.--Except as otherwise provided by 
                the Secretary, a regulated investment company may elect 
                for any taxable year to treat any portion of any 
                qualified late-year loss for such taxable year as 
                arising on the first day of the following taxable year 
                for purposes of this title.
                    ``(B) Qualified late-year loss.--For purposes of 
                this paragraph, the term `qualified late-year loss' 
                means--
                            ``(i) any post-October capital loss, and
                            ``(ii) any late-year ordinary loss.
                    ``(C) Post-october capital loss.--For purposes of 
                this paragraph, the term `post-October capital loss' 
                means the greatest of--
                            ``(i) the net capital loss attributable to 
                        the portion of the taxable year after October 
                        31,
                            ``(ii) the net long-term capital loss 
                        attributable to such portion of the taxable 
                        year, or
                            ``(iii) the net short-term capital loss 
                        attributable to such portion of the taxable 
                        year.
                    ``(D) Late-year ordinary loss.--For purposes of 
                this paragraph, the term `late-year ordinary loss' 
                means the excess (if any) of--
                            ``(i) the sum of--
                                    ``(I) the specified losses (as 
                                defined in section 4982(e)(5)(B)(ii)) 
                                attributable to the portion of the 
                                taxable year after October 31, plus
                                    ``(II) the ordinary losses not 
                                described in subclause (I) attributable 
                                to the portion of the taxable year 
                                after December 31, over
                            ``(ii) the sum of--
                                    ``(I) the specified gains (as 
                                defined in section 4982(e)(5)(B)(i)) 
                                attributable to the portion of the 
                                taxable year after October 31, plus
                                    ``(II) the ordinary income not 
                                described in subclause (I) attributable 
                                to the portion of the taxable year 
                                after December 31.
                    ``(E) Special rule for companies determining 
                required capital gain distributions on taxable year 
                basis.--In the case of a company to which an election 
                under section 4982(e)(4) applies--
                            ``(i) if such company's taxable year ends 
                        with the month of November, the amount of 
                        qualified late-year losses (if any) shall be 
                        computed without regard to any income, gain, or 
                        loss described in subparagraphs (C), (D)(i)(I), 
                        and (D)(ii)(I), and
                            ``(ii) if such company's taxable year ends 
                        with the month of December, subparagraph (A) 
                        shall not apply.''.
    (b) Conforming Amendments.--
            (1) Subsection (b) of section 852 is amended by striking 
        paragraph (10).
            (2) Paragraph (2) of section 852(c) is amended by striking 
        the first sentence and inserting the following: ``For purposes 
        of applying this chapter to distributions made by a regulated 
        investment company with respect to any calendar year, the 
        earnings and profits of such company shall be determined 
        without regard to any net capital loss attributable to the 
        portion of the taxable year after October 31 and without regard 
        to any late-year ordinary loss (as defined in subsection 
        (b)(8)(D)).''
            (3) Subparagraph (D) of section 871(k)(2) is amended by 
        striking the last two sentences and inserting the following: 
        ``For purposes of this subparagraph, the net short-term capital 
        gain of the regulated investment company shall be computed by 
        treating any short-term capital gain dividend includible in 
        gross income with respect to stock of another regulated 
        investment company as a short-term capital gain.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

SEC. 309. EXCEPTION TO HOLDING PERIOD REQUIREMENT FOR CERTAIN REGULARLY 
              DECLARED EXEMPT-INTEREST DIVIDENDS.

    (a) In General.--Subparagraph (E) of section 852(b)(4) is amended 
by striking all that precedes ``In the case of a regulated investment 
company'' and inserting the following:
                    ``(E) Exception to holding period requirement for 
                certain regularly declared exempt-interest dividends.--
                            ``(i) Daily dividend companies.--Except as 
                        otherwise provided by regulations, subparagraph 
                        (B) shall not apply with respect to a regular 
                        dividend paid by a regulated investment company 
                        which declares exempt-interest dividends on a 
                        daily basis in an amount equal to at least 90 
                        percent of its net tax-exempt interest and 
                        distributes such dividends on a monthly or more 
                        frequent basis.
                            ``(ii) Authority to shorten required 
                        holding period with respect to other 
                        companies.--''.
    (b) Conforming Amendment.--Clause (ii) of section 852(b)(4)(E), as 
amended by subsection (a), is amended by inserting ``(other than a 
company described in clause (i))'' after ``regulated investment 
company''.
    (c) Effective Date.--The amendments made by this section shall 
apply to losses incurred on shares of stock for which the taxpayer's 
holding period begins after the date of the enactment of this Act.

 TITLE IV--MODIFICATIONS RELATED TO EXCISE TAX APPLICABLE TO REGULATED 
                          INVESTMENT COMPANIES

SEC. 401. EXCISE TAX EXEMPTION FOR CERTAIN REGULATED INVESTMENT 
              COMPANIES OWNED BY TAX EXEMPT ENTITIES.

    (a) In General.--Subsection (f) of section 4982 is amended--
            (1) by striking ``either'' in the matter preceding 
        paragraph (1),
            (2) by striking ``or'' at the end of paragraph (1),
            (3) by striking the period at the end of paragraph (2), and
            (4) by inserting after paragraph (2) the following new 
        paragraphs:
            ``(3) any other tax-exempt entity whose ownership of 
        beneficial interests in the company would not preclude the 
        application of section 817(h)(4), or
            ``(4) another regulated investment company described in 
        this subsection.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to calendar years beginning after the date of the enactment of this 
Act.

SEC. 402. DEFERRAL OF CERTAIN GAINS AND LOSSES OF REGULATED INVESTMENT 
              COMPANIES FOR EXCISE TAX PURPOSES.

    (a) In General.--Subsection (e) of section 4982 is amended by 
striking paragraphs (5) and (6) and inserting the following new 
paragraphs:
            ``(5) Treatment of specified gains and losses after october 
        31 of calendar year.--
                    ``(A) In general.--Any specified gain or specified 
                loss which (but for this paragraph) would be properly 
                taken into account for the portion of the calendar year 
                after October 31 shall be treated as arising on January 
                1 of the following calendar year.
                    ``(B) Specified gains and losses.--For purposes of 
                this paragraph--
                            ``(i) Specified gain.--The term `specified 
                        gain' means ordinary gain from the sale, 
                        exchange, or other disposition of property 
                        (including the termination of a position with 
                        respect to such property). Such term shall 
                        include any foreign currency gain attributable 
                        to a section 988 transaction (within the 
                        meaning of section 988) and any amount 
                        includible in gross income under section 
                        1296(a)(1).
                            ``(ii) Specified loss.--The term `specified 
                        loss' means ordinary loss from the sale, 
                        exchange, or other disposition of property 
                        (including the termination of a position with 
                        respect to such property). Such term shall 
                        include any foreign currency loss attributable 
                        to a section 988 transaction (within the 
                        meaning of section 988) and any amount 
                        allowable as a deduction under section 
                        1296(a)(2).
                    ``(C) Special rule for companies electing to use 
                the taxable year.--In the case of any company making an 
                election under paragraph (4), subparagraph (A) shall be 
                applied by substituting the last day of the company's 
                taxable year for October 31.
            ``(6) Treatment of mark to market gain.--
                    ``(A) In general.--For purposes of determining a 
                regulated investment company's ordinary income, 
                notwithstanding paragraph (1)(C), each specified mark 
                to market provision shall be applied as if such 
                company's taxable year ended on October 31. In the case 
                of a company making an election under paragraph (4), 
                the preceding sentence shall be applied by substituting 
                the last day of the company's taxable year for October 
                31.
                    ``(B) Specified mark to market provision.--For 
                purposes of this paragraph, the term `specified mark to 
                market provision' means sections 1256 and 1296 and any 
                other provision of this title (or regulations 
                thereunder) which treats property as disposed of on the 
                last day of the taxable year.
            ``(7) Elective deferral of certain ordinary losses.--Except 
        as provided in regulations prescribed by the Secretary, in the 
        case of a regulated investment company which has a taxable year 
        other than the calendar year--
                    ``(A) such company may elect to determine its 
                ordinary income for the calendar year without regard to 
                any net ordinary loss (determined without regard to 
                specified gains and losses taken into account under 
                paragraph (5)) which is attributable to the portion of 
                such calendar year which is after the beginning of the 
                taxable year which begins in such calendar year, and
                    ``(B) any amount of net ordinary loss not taken 
                into account for a calendar year by reason of 
                subparagraph (A) shall be treated as arising on the 1st 
                day of the following calendar year.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to calendar years beginning after the date of the enactment of 
this Act.

SEC. 403. DISTRIBUTED AMOUNT FOR EXCISE TAX PURPOSES DETERMINED ON 
              BASIS OF TAXES PAID BY REGULATED INVESTMENT COMPANY.

    (a) In General.--Subsection (c) of section 4982 is amended by 
adding at the end the following new paragraph:
            ``(4) Special rule for estimated tax payments.--
                    ``(A) In general.--In the case of a regulated 
                investment company which elects the application of this 
                paragraph for any calendar year--
                            ``(i) the distributed amount with respect 
                        to such company for such calendar year shall be 
                        increased by the amount on which qualified 
                        estimated tax payments are made by such company 
                        during such calendar year, and
                            ``(ii) the distributed amount with respect 
                        to such company for the following calendar year 
                        shall be reduced by the amount of such 
                        increase.
                    ``(B) Qualified estimated tax payments.--For 
                purposes of this paragraph, the term `qualified 
                estimated tax payments' means, with respect to any 
                calendar year, payments of estimated tax of a tax 
                described in paragraph (1)(B) for any taxable year 
                which begins (but does not end) in such calendar 
                year.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to calendar years beginning after the date of the enactment of this 
Act.

SEC. 404. INCREASE IN REQUIRED DISTRIBUTION OF CAPITAL GAIN NET INCOME.

    (a) In General.--Subparagraph (B) of section 4982(b)(1) is amended 
by striking ``98 percent'' and inserting ``98.2 percent''.
    (b) Effective Date.--The amendments made by this section shall 
apply to calendar years beginning after the date of the enactment of 
this Act.

                       TITLE V--OTHER PROVISIONS

SEC. 501. REPEAL OF ASSESSABLE PENALTY WITH RESPECT TO LIABILITY FOR 
              TAX OF REGULATED INVESTMENT COMPANIES.

    (a) In General.--Part I of subchapter B of chapter 68 is amended by 
striking section 6697 (and by striking the item relating to such 
section in the table of sections of such part).
    (b) Conforming Amendment.--Section 860 is amended by striking 
subsection (j).
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

SEC. 502. MODIFICATION OF SALES LOAD BASIS DEFERRAL RULE FOR REGULATED 
              INVESTMENT COMPANIES.

    (a) In General.--Subparagraph (C) of section 852(f)(1) is amended 
by striking ``subsequently acquires'' and inserting ``acquires, during 
the period beginning on the date of the disposition referred to in 
subparagraph (B) and ending on January 31 of the calendar year 
following the calendar year that includes the date of such 
disposition,''.
    (b) Effective Date.--The amendment made by this section shall apply 
to charges incurred in taxable years beginning after the date of the 
enactment of this Act.
                                 <all>