SEC. 3. BASIC DESIGNATION RULE

Subject to the limitations in section 5, if a RIC or REIT designates a dividend as a capital gain dividend for a taxable year ending on or after May 7, 1997, it may also designate the dividend as a 20% rate gain distribution, an unrecaptured section 1250 gain distribution, or a 28% rate gain distribution. If no additional designation is made regarding a capital gain dividend, it is a 28% rate gain distribution. If a dividend was designated as a capital gain dividend in a written notice mailed to shareholders on or before December 31, 1997, the additional designations permitted by this paragraph may be effected by a written notice, mailed to all shareholders not later than February 2, 1998.

If any capital gain dividend is received on or after May 7, 1997, but is treated

This test for materiality is intended to reflect reasonable estate administration practices and would generally be simple to apply.

Another approach under consideration is a test for materiality that provides for a de minimis safe harbor amount of income that may be used to pay administration expenses without constituting a material limitation on the surviving spouse’s right to income. The safe harbor amount could be a cumulative amount determined by a percentage of gross income derived from the property during the period of administration, or a specified dollar amount, or some combination thereof. If more than the safe harbor amount of income were used to pay administration expenses, the marital deduction would be reduced dollar for dollar by the excess over the safe harbor amount of income so used.

The safe harbor approach provides a “bright line” material limitation test. However, if the safe harbor amount were based on the cumulative amount of income derived from the property during administration, the safe harbor amount would have to be recomputed yearly to reflect additional income earned during the year, which might make the test difficult to apply.

An additional approach would be to adopt a regulation stating that any use of income for the payment of administration expenses constitutes a material limitation on the spouse’s right to income.

REQUEST FOR COMMENTS

The Service and Treasury invite comments on the tests for materiality described above and also welcome any suggestions for alternative approaches to the issue. In addition, the Service and Treasury are interested in receiving comments on (1) whether the test for materiality under § 20.2056(b)–4(a) should be a quantitative test based on a comparison of the relative size of the income and the expenses charged to income; (2) whether materiality should be determined based on projections as of the date of death rather than on the facts that develop afterwards; and (3) whether present value principles should be applied and, if so, how the practical difficulties of a present value computation can be overcome.

The Service and Treasury are also interested in receiving comments on

whether post-death interest accruing on deferred federal estate tax should be treated as properly charged to principal. Rev. Rul. 93–48, 1993–2 C.B. 270, holds that post-death interest accruing on deferred federal estate tax payable from a testamentary transfer does not ordinarily reduce the date of death value of the transfer.

Comments and suggestions are requested by February 4, 1998. An original and eight copies of written comments should be sent to:

Internal Revenue Service Attn: CC:DOM:CORP:R Room 5431 (P&SI:Br4) P.O. Box 7604 Ben Franklin Station Washington, DC 20044

or hand delivered between the hours of 8:00 a.m. and 5:00 p.m. to: Courier’s Desk Internal Revenue Service Attn: CC:DOM:CORP:R Room 5431 (P&SI:Br4) 1111 Constitution Ave., NW Washington, DC

Alternatively, comments may be submitted electronically via the Service’s Internet site at:

http://www.irs.ustreas.gov/prod/tax_re

gs/comments.html All comments will be available for public inspection and copying in their entirety.

DRAFTING INFORMATION

The principal author of this notice is Deborah Ryan of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice contact Ms. Ryan on (202) 622-3090 (not a toll-free call).

Temporary Regulations To Be Issued Under Section 1(h) of the Internal Revenue Code (Applying Section 1(h) to Capital Gain Dividends of RICs and REITs).

Notice 97–64