To amend the Internal Revenue Code of 1986 to allow individuals to defer recognition of reinvested capital gains distributions from regulated investment companies.

January 4, 2005

Mr. SAXTON introduced the following bill; which was referred to the Committee on Ways and Means

To amend the Internal Revenue Code of 1986 to allow individuals to defer recognition of reinvested capital gains distributions from regulated investment companies.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. DEFERRAL OF CERTAIN REINVESTED CAPITAL GAIN DIVIDENDS OF REGULATED INVESTMENT COMPANIES.

(a) In General- Part III of subchapter O of chapter 1 of the Internal Revenue Code of 1986 (relating to common nontaxable exchanges) is amended by inserting after section 1045 the following new section:

`SEC. 1046. CERTAIN REINVESTED CAPITAL GAIN DIVIDENDS OF REGULATED INVESTMENT COMPANIES.

`(a) Nonrecognition of Gain- In the case of an individual electing the application of this section, no gain shall be recognized on the receipt of a capital gain dividend distributed by a regulated investment company to which part I of subchapter M applies if such capital gain dividend is automatically reinvested in additional shares of the company pursuant to a dividend reinvestment plan.

`(b) Limitation-

`(1) IN GENERAL- The amount of gain that may be deferred under subsection (a) for any taxable year shall not exceed--

`(A) $5,000, or

`(B) in the case of a joint return, twice the amount in subparagraph (A).

`(2) INFLATION ADJUSTMENT OF MAXIMUM EXCLUSION-

`(A) IN GENERAL- In the case of any taxable year beginning in a calendar year after 2005, the amount in paragraph (1)(A) shall be increased by an amount equal to--

`(i) such dollar amount, multiplied by

`(ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting `calendar year 2004' for `calendar year 1992' in subparagraph (B) thereof.

`(B) ROUNDING RULES- The amount in paragraph (1)(A), after adjustment under paragraph (2)(A), shall be rounded to the nearest multiple of $100.

`(c) Capital Gain Dividend- For purposes of this section, the term `capital gain dividend' has the meaning given to such term by section 852(b)(3)(C).

`(d) Recapture of Previously Deferred Capital Gain Dividends- Amounts deferred pursuant to subsection (a) (and not previously recognized under this subsection) shall be recognized upon the subsequent sale or redemption of shares in the distributing company to the extent of the taxpayer's adjusted basis in the shares so sold or redeemed.

`(e) Section not to Apply to Certain Taxpayers- No deduction shall be allowed under this section to--

`(1) an individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which such individual's taxable year begins, or

`(2) an estate or trust.

`(f) Election- An election under this section shall be made at such time and in such manner as the Secretary may prescribe.'.

(b) Conforming Amendments-

(1) Section 852(b)(3)(B) of such Code is amended by adding at the end the following new sentence: `For rules regarding nonrecognition of gain with respect to certain reinvested capital gain dividends received by individuals, see section 1046.'.

(2) The table of sections for part III of subchapter O of chapter 1 of such Code is amended by inserting after the item relating to section 1045 the following new item:

`Sec. 1046. Certain Reinvested Capital Gain Dividends of Regulated Investment Companies.'.

(c) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2004.

END