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TITLE 26-INTERNAL REVENUE CODE 561) determined with reference to capital gain dividends only. (B) Treatment of capital gain dividends by share- holders A capital gain dividend shall be treated by the shareholders as a gain from the sale or exchange of a capital asset held for more than 9 months. (C) Definition of capital gain dividend For purposes of this part, a capital gain dividend is any dividend, or part thereof, which is designated by the company as a capital gain dividend in a written notice mailed to its shareholders not later than 45 days after the close of its taxable year. If the aggregate amount so designated with respect to a taxable year of the company (including capital gains dividends paid after the close of the taxable year described in section 855) is greater than the net capital gain of the taxable year, the portion of each distribution which shall be a capital gain dividend shall be only that proportion of the amount so designated which such net capital gain bears to the aggregate amount so designated. (D) Treatment by shareholders of undistributed capital gains (i) Every shareholder of a regulated in- vestment company at the close of the co- mapny's taxable year shall include, in computing his long-term capital gains in his return for his taxable year in which the last day of the company's taxable year falls, such amount as the company shall designate in respect of such shares in a written notice mailed to its share- holders at any time prior to the expira- tion of 45 days after close of its taxable year, but the amount so includible by any shareholder shall not exceed that part of the amount subjected to tax in subpara- graph (A) which he would have received it all of such amount had been distributed as capital gain dividends by the company to the holders of such shares at the close of its taxable year. (ii) For purposes of this title, every such shareholder shall be deemed to have paid, for his taxable year under clause (I), the tax imposed by subparagraph (A) on the amounts required by this subparagraph to be included in respect of such shares in computing his long-term capital gains for that year; and such shareholder shall be allowed credit or refund, as the case may be, for the tax so deemed to have been paid by him. (iii) The adjusted basis of such shares in the hands of the shareholder shall be in- creased, with respect to the amounts re- quired by this subparagraph to be includ- ed in computing his long-term capital gains, by 70 percent of so much of such amounts as equals the amount subject to tax in accordance with section 1201(a). (iv) In the event of such designation the tax imposed by subparagraph (A) shall be paid by the regulated investment compa- ny within 30 days after close of its taxable year. v) The earnings and profits of such reg- ulated investment company, and the earn- ings and profits of any such shareholder which is a corporation, shall be appropri- ately adjusted in accordance with regula- tions prescribed by the Secretary. (4) Loss on sale or exchange of stock held less than 31 days If- (A) under subparagraph (B) or (D) of paragraph (3) a shareholder of a regulated investment company is required, with re- spect to any share, to treat any amount as a long-term capital gain, and (B) such share is held by the taxpayer for less than 31 days, then any loss on the sale or exchange of such share shall, to the extent of the amount de- scribed in subparagraph (A) of this para- graph, be treated as loss from the sale or ex- change of a capital asset held for more than 9 months. For purposes of this paragraph, the rules of section 246(c)(3) shall apply in deter- mining whether any share of stock has been held for less than 31 days; except that "30 days" shall be substituted for the number of days specified in subparagraph (B) of section 246(c)(3). (5) Exempt-interest dividends If, at the close of each quarter of its taxable year, at least 50 percent of the value (as de- fined 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 An exempt-interest dividend means any dividend or part thereof (other than a cap- ital gain dividend) paid by a regulated in- vestment company and designated 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. If the aggregate amount so designated with respect to a taxable year of the compa- ny (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 103(a)(1), over (ii) the amounts disallowed as deduc- tions under sections 265 and 171(a)(2), the portion of such distribution which shall constitute an 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) Treatment of exempt-interest dividends by shareholders An exempt-interest dividend shall be treated by the shareholders for all purposes of this subtitle as an item of interest ex- cludable from gross income under section 103(a)(1). Such purposes include but are not limited to- Page 539 § 852