SEC. 2. BACKGROUND

For individuals, estates, and trusts, § 1(h), as amended by the Taxpayer Relief Act of 1997 (the “1997 Act”), Pub. L. No. 105–34, 111 Stat. 788, imposes differing rates of tax on various transactions giving rise to long-term capital gains or losses. For transactions taken into account during taxable years ending on or after May 7, 1997, a taxpayer’s long-term capital gains and losses are separated into three tax rate groups: a 20-percent group, a 25-percent group, and a 28-percent group. See Notice 97–59, 1997–45 I.R.B. 7.

The Secretary has authority to issue regulations concerning the application of section 1(h) to long-term gains from sales or exchanges by (or of interests in) passthrough entities, including RICs and REITs.

To the extent that a RIC or a REIT has net capital gain for a taxable year, dividends that it pays during the year (or that it is deemed to pay during the year under § 855, § 858, or § 860) may be designated by it as capital gain dividends. In general, a capital gain dividend is treated by the shareholders as a gain from the sale or exchange of a capital asset held for more than one year.