Section 871.—Tax on Nonresident Alien Individuals

In making the dividend designations permitted by sections 871(k)(1)(C) and (2)(C) of the Internal Revenue Code, may a regulated investment company (“RIC”) designate the maximum amount permitted under each provision even if the aggregate of all of the amounts so designated exceeds the total amount of the RIC’s dividend distributions. See Rev. Rul. 2005-31, page 1084.

by a nonresident alien individual, intended to reduce the benefits conferred by the JGTRRA for qualified dividend income received from the RIC by individuals who are United States persons. Similarly, there is no indication that Congress intended that the benefits conferred by the JGTRRA for qualified dividend income received from a RIC would apply to reduce the benefits conferred by the AJCA for interest-related dividends and short-term capital gains received from the RIC. To achieve the purposes of the provisions of both the AJCA and the JGTRRA, R may designate each of the maximum amounts described above, and A and B may apply different designations to their distributions.

Therefore, with respect to its dividend distributions of $20,000 x for the taxable year, R may designate $5,000 x as a capital gain dividend, $10,000 x as a distribution of qualified dividend income, $6,000 x as an interest related dividend, and $5,000 x as a short-term capital gain dividend. These are, respectively, 25 percent, 50 percent, 30 percent, and 25 percent of the $20,000 x distribution. If R makes these designations and properly advises its shareholders that these percentages apply to the distributions that each received, then A and B may apply the designations as follows. Of the $20 x received by A from R, A may treat 25 percent ($5 x ) as a capital gain dividend and 50 percent ($10 x ) as qualified dividend income that is subject to a maximum tax rate of 15 percent. The remaining $5 x is reportable as dividend income that is not qualified dividend income. Of the $20 x received by B from R, B may treat 25 percent ($5 x ) as a capital gain dividend, 30 percent ($6 x ) as an interest-re

lated dividend, and 25 percent ($5 x ) as a short-term capital gain dividend. The remaining $4 x is dividend income that is not qualified dividend income. Assuming all other necessary conditions are satisfied, the $5 x of capital gain dividends, the $6 x of interest-related dividends, and $5 x of short-term capital gain dividends are exempt from United States withholding tax.

HOLDINGS

(1) In making the dividend designations permitted by §§ 852(b)(3)(C) and (b)(5)(A), 854(b)(1) and (2), and 871(k)(1)(C) and 2(C), a RIC may designate the maximum amount permitted under each provision even if the aggregate of all of the amounts so designated exceeds the total amount of the RIC’s dividend distributions.

(2) Individual shareholders of the RIC who are United States persons may apply designations to the dividends they receive from the RIC that differ from designations applied by shareholders who are nonresident alien individuals.

DRAFTING INFORMATION

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

2005–21 I.R.B. 1086 May 23, 2005