SECTION 4. EXAMPLES

(1) Example 1 . RIC X ’s taxable year ends on April 30. X has only the following capital gains and losses for the periods indicated, all of which are from sales of stock held for less than five years:

income is disregarded in determining the amount of gain properly taken into account for the portion of a taxable year on or after May 6, 2003. (Under § 854(b) or § 857(c), qualified dividend income received by the RIC or REIT may contribute to a separate designation of other RIC or REIT dividends.)

adjustment or bifurcation adjustment described in section 6 of Notice 97–64.

if applicable, the JGTRRA transition rule for taxable years that contain May 6, 2003. The JGTRRA transition rule, however, interacts with the deferral adjustment in a way that differs from the interaction between that adjustment and the transition rule for the 1997 reductions in capital gains rates. That is, for purposes of the JGTRRA transition rule, the deferral adjustment is applied in determining whether a gain or loss is taken into account before May 6, 2003, or after May 5, 2003. For example, if a RIC sells shares of stock before May 6, 2003, but the sale is treated under § 852(b)(3)(C) and § 1.852–11(e) as arising after that date, the sale is taken into account on the

later date for purposes of the JGTRRA transition rule. This application of the deferral adjustment differs from the special rule in section 6 of Notice 97–64 for transactions occurring during 1997. The JGTRRA transition rule applies at both the RIC/REIT level and at the shareholder level. That is, the rule applies at the RIC/REIT level to taxable years of the RIC or REIT that contain May 6, 2003, to govern how capital gain dividends may be designated, and it applies to taxable years of RIC/REIT shareholders that contain May 6, 2003, to govern the application of § 1(h) to the shareholder for that taxable year. Thus, if a RIC or REIT pays a capital gain dividend during 2004 that it properly designates as a 20%-rate gain distribution and the dividend is received by a fiscal year trust in a year of the trust that includes May 6, 2003, the dividend is treated by the trust as gain that is properly taken into account for the portion of the taxable year before May 6, 2003. On the other hand, if that same capital gain dividend is received during 2004 by an individual shareholder, or a trust, whose taxable year is the calendar year, the dividend is subject to tax at a rate no higher than 15 percent, because the JGTRRA transition rule applies only to shareholder taxable years that include May 6, 2003.

X does not make a deferral adjustment because X does not have a post-October net capital loss or net long-term capital loss for its taxable year ending April 30, 2004. X must make a bifurcation adjustment, however, because it has a pre-November net capital gain, it has a taxable year ending in April, and it does not make a deferral adjustment. Because X must apply both the bifurcation adjustment and the JGTRRA transition rule, for the pre-November and post-October portions of this taxable year X must make separate determinations of the maximum amounts that may be designated as 20%-rate gain and 15%-rate gain. The

sum of these amounts determines the various maximum amounts that can be designated in the different classes of gain for the entire year.

For the pre-November period, the JGTRRA transition rule applies because the period includes May 6, 2003. Thus, X determines a net capital gain amount using only gain and loss properly taken into account for the portion of the taxable year that is on or after May 6, 2003 (and, because the determination is for the pre-November period, on or before October 31, 2003). The amount so determined is $0. X ’s net capital gain for the entire pre-November period is $100 x .

Thus, for the pre-November period, X ’s maximum designation of 20%-rate gain is $100 x and its maximum designation of 15%- rate gain is $0. ( X also has a net short-term gain of $10 x in the pre-November period, which results in a dividend that is not specially designated and is treated by shareholders as ordinary income.)

For the post-October period, the JGTRRA transition rule does not apply because that period does not include May 6, 2003. Because X has $110 x of net capital gain for that period, X ’s maximum designation of 15%-rate gain is $110 x .

2004-22 I.R.B. 983 June 1, 2004

For the taxable year ending April 30, 2004, therefore, X may designate up to $210 x of capital gain dividends, of which up to $110 x may be designated as

15%-rate gain distributions and up to $100 x may be designated as 20%-rate gain distributions.

(2) Example 2 . RIC Y ’s taxable year ends on April 30. Y has only the following capital gains and losses for the periods indicated, all of which are from sales of stock held for less than five years:

Y does not make a deferral adjustment because it does not have a post-October net capital loss or net long-term capital loss for its taxable year ending April 30, 2004. Y does not make a bifurcation adjustment because it does not have a net capital gain for the pre-November portion of its taxable year ending April 30, 2004. Because Y ’s taxable year ending April 30, 2004, includes May 6, 2003, the JGTRRA transition rule applies in determining Y ’s maximum designations of capital gain for that taxable year.

Y ’s net capital gain for the entire year is $100 x . Y ’s net capital gain determined using only gain and loss properly taken into account for the portion of the taxable year on or after May 6, 2003, however, is $10 x . For this taxable year, Y may designate up to $100 x of capital gain dividends, of which up to $10 x may be designated as 15%-rate gain distributions and up to $90 x may be designated as 20%-rate gain distributions.

Assume that Y pays a capital gain dividend on December 1, 2004, and that, under § 855(a), Y treats the dividend as having been paid during its taxable year ending April 30, 2004, but that, under § 855(b), Y ’s shareholders treat the dividend as having been received in their taxable years that contain December 1, 2004. Assume also that shareholder A of Y is an individual, estate, or trust whose taxable year is the calendar year and that, on December 1, 2004, A receives from Y a dividend of $10 x, of which $1 x is designated as a 15%-rate gain distribution and $9 x is designated as a 20%-rate gain distribution. Because A ’s 2004 taxable year does not include May 6, 2003, neither the JGTRRA transition rule nor JGTRRA § 301(c)(4) applies to A for that taxable year. Thus, the $10 x capital gain dividend received by A in 2004 is subject to a tax rate no higher than 15 percent.

DRAFTING INFORMATION

The principal author of this notice is Sonja Kotlica of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this notice, contact Ms. Kotlica at (202) 622–3960 (not a toll-free call).

26 CFR 601.201: Rulings and determination letters. (Also Part I, §§ 851, 852; 1.851–2.)

Rev. Proc. 2004–28