SEC. 5. LIMITATIONS ON

DESIGNATIONS OF CAPITAL GAIN DIVIDENDS

Additional designations of capital gain dividends for a taxable year are effective only to the extent that they do not exceed the limitations stated below and only to the extent that they comply with the principles of Rev. Rul. 89–81, 1989–1 C.B. 226, which requires that distributions made to different classes of shares not be composed disproportionately of dividends of a particular type. Designations of capital gain dividends must also comply with § 852(b)(3)(C) or § 857(b)(3)(C) (as appropriate), which make designations ineffective to the extent they exceed the net capital gain for the year.

Subject to a deferral adjustment or bifurcation adjustment discussed in section 6, a RIC or REIT determines the maximum amounts which may be designated in each class of capital gains dividends by performing the computation required by § 1(h) as if the RIC or REIT were an individual whose ordinary income is subject to a marginal tax rate of at least 28 percent. Then, the maximum distributable 20% rate gain is equal to the amount multiplied by 20% in performing that computation and the maximum distributable un

recaptured section 1250 gain is equal to the amount multiplied by 25% in performing that computation. The maximum distributable 28% rate gain is the net capital gain minus the amount of unrecaptured section 1250 gain distributions and 20% rate gain distributions that have been properly designated. For example, if a RIC has net capital gain in the tax year of $100, of which $60 would be multiplied by 20% and $5 would be multiplied by 25% in performing the computations required by § 1(h), then the maximum distributable 20% rate gain is $60 and the maximum unrecaptured section 1250 gain is $5. If the RIC properly designates the maximum permissible unrecaptured section 1250 gain distribution and 20% rate gain distribution, then the RIC’s maximum distributable 28% rate gain is $35; i.e., the net capital gain of $100 less the properly designated unrecaptured section 1250 gain distribution of $5 and 20% rate gain distribution of $60.