SECTION 5. LIMITATIONS ON

DESIGNATIONS OF CAPITAL GAIN DIVIDENDS

The limitations in section 5 of Notice 97–64 continue to apply, with appropriate modifications to take into account changes to § 1(h) and changes described in section 3 of this notice to the designation and reporting requirements.

Reports (or designations) of capital gain dividends (or undistributed capital gain) for a taxable year are effective only to the extent that the aggregate amounts reported or designated do not exceed applicable limitations. ⁵ The additional reports and designations described in section 3 of this notice must be consistent with the principles of Revenue Ruling 89–81 and must not together exceed the following limits.

A RIC determines the maximum amount that may be reported or designated for each rate group by performing the computation required by § 1(h) (with the modifications described in this notice) as if the RIC were an individual whose ordinary income is subject to a marginal tax rate of 39.6 percent. In this determination—

• The maximum 20% rate gain is equal to the amount that is multiplied by 20% in the computation;

• The maximum unrecaptured section 1250 gain is equal to the amount that is multiplied by 25% in performing the computation; and

• The maximum 28% rate gain is the RIC’s net capital gain for the taxable year minus the sum of the maximum unrecaptured section 1250 gain and the maximum 20% rate gain.

The computation under § 1(h) is modified in the following three ways:

• The RIC disregards qualified dividend income;

• The RIC must first give effect to any election under § 852(b)(8) to treat all or a portion of a post-October capital loss as arising on the first day of the next taxable year, as described in section 6 of this notice; and

• The RIC must give effect to the bifurcation adjustment described in section 7 of this notice, if applicable.

As described in section 8 of Notice 97–64, which continues to apply, the maximum distributable section 1202 gain for each issuer is calculated separately from the limitations on the other classes of capital gain dividends and may not in the aggregate exceed the RIC’s net capital gain. Section 1202 gain distributions are subject to the limitations provided by § 1202(g).