‘‘(I) any interest on an obligation
issued by a corporation or partnership
if the regulated investment company
is a 10-percent shareholder in such
corporation or partnership, and
‘‘(II) any interest which is treat-
ed as not being portfolio interest
under the rules of subsection (h)(4).
‘‘(iii) Any interest referred to in sub-
section (i)(2)(A) (without regard to the
trade or business of the regulated invest-
ment company).
‘‘(iv) Any interest-related dividend in-
cludible in gross income with respect to
stock of another regulated investment com-
pany.
‘‘(F) 10-PERCENT
SHAREHOLDER.—For
purposes of this paragraph, the term ‘10-per-
cent shareholder’ has the meaning given to such
term by subsection (h)(3)(B).
‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), no tax shall be imposed
under paragraph (1)(A) of subsection (a) on
any short-term capital gain dividend received
from a regulated investment company.
‘‘(B) EXCEPTION
FOR
ALIENS
TAXABLE
UNDER SUBSECTION (a)(2).—Subparagraph (A)
shall not apply in the case of any nonresident
alien individual subject to tax under subsection
(a)(2).
‘‘(C) SHORT-TERM
CAPITAL
GAIN
DIVI-
DEND.—For purposes of this paragraph, a
short-term capital gain dividend is any dividend
(or part thereof) which is designated by the reg-
ulated investment company as a short-term cap-
ital gain dividend in a written notice mailed to
its shareholders not later than 60 days after the
close of its taxable year. If the aggregate
amount so designated with respect to a taxable
year of the company (including amounts so des-
ignated with respect to dividends paid after the
close of the taxable year described in section
855) is greater than the qualified short-term
gain of the company for such taxable year, the
portion of each distribution which shall be a
short-term capital gain dividend shall be only
that portion of the amounts so designated
which such qualified short-term gain bears to
the aggregate amount so designated.
‘‘(D) QUALIFIED SHORT-TERM GAIN.—For
purposes of subparagraph (C), the term ‘quali-
fied short-term gain’ means the excess of the
net short-term capital gain of the regulated in-
vestment company for the taxable year over the
net long-term capital loss (if any) of such com-
pany for such taxable year. For purposes of this
subparagraph—
‘‘(i) the net short-term capital gain of
the regulated investment company shall be
computed by treating any short-term cap-
ital gain dividend includible in gross in-
come with respect to the stock of another
regulated investment company as a short-
term capital gain, and
‘‘(ii) the excess of the net short-term
capital gain for a taxable year over the net
long-term capital loss for a taxable year (to
which an election under section 4982(e)(4)
does not apply) shall be determined with-
out regard to any net capital loss or net
short-term capital loss attributable to
transactions after October 31 of such year,
and any such net capital loss or net short-
term capital loss shall be treated as arising
on the 1st day of the next taxable year.
To the extent provided in regulations, clause
(ii) shall apply also for purposes of computing
the taxable income of the regulated investment
company.’’.
(2) FOREIGN CORPORATIONS.—Section 881 is
amended by redesignating subsection (e) as sub-
section (f) and by inserting after subsection (d) the
following new subsection:
‘‘(e) TAX NOT TO APPLY TO CERTAIN DIVIDENDS
OF REGULATED INVESTMENT COMPANIES.—
‘‘(1) INTEREST-RELATED DIVIDENDS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), no tax shall be imposed
under paragraph (1) of subsection (a) on any
interest-related dividend (as defined in section
871(k)(1)) received from a regulated investment
company.
‘‘(B) 
EXCEPTION.—Subparagraph 
(A)
shall not apply—
‘‘(i) to any dividend referred to in sec-
tion 871(k)(1)(B), and
‘‘(ii) to any interest-related dividend
received by a controlled foreign corporation
(within the meaning of section 957(a)) to
the extent such dividend is attributable to
interest received by the regulated invest-
ment company from a person who is a re-
lated person (within the meaning of section
864(d)(4)) with respect to such controlled
foreign corporation.
‘‘(C) TREATMENT
OF
DIVIDENDS
RE-
CEIVED
BY
CONTROLLED
FOREIGN
CORPORA-
TIONS.—The rules of subsection (c)(5)(A) shall
apply to any interest-related dividend received
by a controlled foreign corporation (within the
meaning of section 957(a)) to the extent such
dividend is attributable to interest received by
the regulated investment company which is de-
scribed in clause (ii) of section 871(k)(1)(E)
(and not described in clause (i) or (iii) of such
section).
‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—
No tax shall be imposed under paragraph (1) of sub-
section (a) on any short-term capital gain dividend
(as defined in section 871(k)(2)) received from a
regulated investment company.’’.