II 
Calendar No. 640 
111TH CONGRESS 
2D SESSION 
H. R. 4337 
IN THE SENATE OF THE UNITED STATES 
SEPTEMBER 29, 2010 
Received; read the first time 
NOVEMBER 15, 2010 
Read the second time and placed on the calendar 
AN ACT 
To amend the Internal Revenue Code of 1986 to modify 
certain rules applicable to regulated investment compa-
nies, and for other purposes. 
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE, ETC. 
(a) SHORT TITLE.—This Act may be cited as the 
‘‘Regulated Investment Company Modernization Act of 
2010’’. 
(b) REFERENCE.—Except as otherwise expressly pro-
vided, whenever in this Act an amendment or repeal is 
expressed in terms of an amendment to, or repeal of, a 
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section or other provision, the reference shall be consid-
ered to be made to a section or other provision of the In-
ternal Revenue Code of 1986. 
(c) TABLE OF CONTENTS.—The table of contents for 
this Act is as follows: 
Sec. 1. Short title, etc. 
TITLE I—CAPITAL LOSS CARRYOVERS OF REGULATED 
INVESTMENT COMPANIES 
Sec. 101. Capital loss carryovers of regulated investment companies. 
TITLE II—MODIFICATION OF GROSS INCOME AND ASSET TESTS 
OF REGULATED INVESTMENT COMPANIES 
Sec. 201. Income from commodities counted toward gross income test of regu-
lated investment companies. 
Sec. 202. Savings provisions for failures of regulated investment companies to 
satisfy gross income and asset tests. 
TITLE III—MODIFICATION OF RULES RELATED TO DIVIDENDS 
AND OTHER DISTRIBUTIONS 
Sec. 301. Modification of dividend designation requirements and allocation rules 
for regulated investment companies. 
Sec. 302. Earnings and profits of regulated investment companies. 
Sec. 303. Pass-thru of exempt-interest dividends and foreign tax credits in fund 
of funds structure. 
Sec. 304. Modification of rules for spillover dividends of regulated investment 
companies. 
Sec. 305. Return of capital distributions of regulated investment companies. 
Sec. 306. Distributions in redemption of stock of a regulated investment com-
pany. 
Sec. 307. Repeal of preferential dividend rule for publicly offered regulated in-
vestment companies. 
Sec. 308. Elective deferral of certain late-year losses of regulated investment 
companies. 
Sec. 309. Exception to holding period requirement for certain regularly declared 
exempt-interest dividends. 
TITLE IV—MODIFICATIONS RELATED TO EXCISE TAX 
APPLICABLE TO REGULATED INVESTMENT COMPANIES 
Sec. 401. Excise tax exemption for certain regulated investment companies 
owned by tax exempt entities. 
Sec. 402. Deferral of certain gains and losses of regulated investment compa-
nies for excise tax purposes. 
Sec. 403. Distributed amount for excise tax purposes determined on basis of 
taxes paid by regulated investment company. 
Sec. 404. Increase in required distribution of capital gain net income. 
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TITLE V—OTHER PROVISIONS 
Sec. 501. Repeal of assessable penalty with respect to liability for tax of regu-
lated investment companies. 
Sec. 502. Modification of sales load basis deferral rule for regulated investment 
companies. 
TITLE VI—PAYGO COMPLIANCE 
Sec. 601. Paygo compliance. 
TITLE 
I—CAPITAL 
LOSS 
CARRYOVERS OF REGULATED 
INVESTMENT COMPANIES 
SEC. 101. CAPITAL LOSS CARRYOVERS OF REGULATED IN-
VESTMENT COMPANIES. 
(a) IN GENERAL.—Subsection (a) of section 1212 is 
amended by redesignating paragraph (3) as paragraph (4) 
and by inserting after paragraph (2) the following new 
paragraph: 
‘‘(3) REGULATED INVESTMENT COMPANIES.— 
‘‘(A) IN GENERAL.—If a regulated invest-
ment company has a net capital loss for any 
taxable year— 
‘‘(i) paragraph (1) shall not apply to 
such loss, 
‘‘(ii) the excess of the net short-term 
capital loss over the net long-term capital 
gain for such year shall be a short-term 
capital loss arising on the first day of the 
next taxable year, and 
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‘‘(iii) the excess of the net long-term 
capital loss over the net short-term capital 
gain for such year shall be a long-term 
capital loss arising on the first day of the 
next taxable year. 
‘‘(B) 
COORDINATION
WITH
GENERAL 
RULE.—If a net capital loss to which paragraph 
(1) applies is carried over to a taxable year of 
a regulated investment company— 
‘‘(i) LOSSES TO WHICH THIS PARA-
GRAPH APPLIES.—Clauses (ii) and (iii) of 
subparagraph (A) shall be applied without 
regard to any amount treated as a short- 
term capital loss under paragraph (1). 
‘‘(ii) LOSSES
TO
WHICH
GENERAL 
RULE
APPLIES.—Paragraph (1) shall be 
applied by substituting ‘net capital loss for 
the loss year or any taxable year thereafter 
(other than a net capital loss to which 
paragraph (3)(A) applies)’ for ‘net capital 
loss for the loss year or any taxable year 
thereafter’.’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Subparagraph (C) of section 1212(a)(1) is 
amended to read as follows: 
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‘‘(C) a capital loss carryover to each of the 
10 taxable years succeeding the loss year, but 
only to the extent such loss is attributable to a 
foreign expropriation loss,’’. 
(2) Paragraph (10) of section 1222 is amended 
by striking ‘‘section 1212’’ and inserting ‘‘section 
1212(a)(1)’’. 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall apply to net capital losses for taxable years be-
ginning after the date of the enactment of this Act. 
(2) COORDINATION RULES.—Subparagraph (B) 
of section 1212(a)(3) of the Internal Revenue Code 
of 1986, as added by this section, shall apply to tax-
able years beginning after the date of the enactment 
of this Act. 
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TITLE 
II—MODIFICATION 
OF 
GROSS INCOME AND ASSET 
TESTS 
OF 
REGULATED 
IN-
VESTMENT COMPANIES 
SEC. 201. INCOME FROM COMMODITIES COUNTED TOWARD 
GROSS INCOME TEST OF REGULATED IN-
VESTMENT COMPANIES. 
(a) GROSS INCOME TEST.—Subparagraph (A) of sec-
tion 851(b)(2) is amended— 
(1) by striking ‘‘foreign currencies’’ and insert-
ing ‘‘commodities’’, and 
(2) by striking ‘‘or currencies’’ and inserting 
‘‘or commodities’’. 
(b) REPEAL OF REGULATORY AUTHORITY TO EX-
CLUDE
CERTAIN
FOREIGN
CURRENCY
GAINS
FROM 
QUALIFYING INCOME.—Subsection (b) of section 851 is 
amended by striking ‘‘For purposes of paragraph (2), the 
Secretary may by regulation exclude from qualifying in-
come foreign currency gains which are not directly related 
to the company’s principal business of investing in stock 
or securities (or options and futures with respect to stock 
or securities).’’ in the flush matter after paragraph (3). 
(c) CONFORMING AMENDMENTS.— 
(1) Subsection (h) of section 851 is amended by 
inserting ‘‘(determined by substituting ‘foreign cur-
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rencies’ for ‘commodities’ therein)’’ after ‘‘subsection 
(b)(2)(A)’’. 
(2) Paragraph (4) of section 7704(d) is amend-
ed by inserting ‘‘(determined by substituting ‘foreign 
currencies’ for ‘commodities’ therein)’’ after ‘‘section 
851(b)(2)(A)’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
the date of the enactment of this Act. 
SEC. 202. SAVINGS PROVISIONS FOR FAILURES OF REGU-
LATED INVESTMENT COMPANIES TO SATISFY 
GROSS INCOME AND ASSET TESTS. 
(a) ASSET TEST.—Subsection (d) of section 851 is 
amended— 
(1) by striking ‘‘A corporation which meets’’ 
and inserting the following: 
‘‘(1) 
IN
GENERAL.—A 
corporation 
which 
meets’’, and 
(2) by adding at the end the following new 
paragraph: 
‘‘(2) SPECIAL RULES REGARDING FAILURE TO 
SATISFY
REQUIREMENTS.—If paragraph (1) does 
not preserve a corporation’s status as a regulated in-
vestment company for any particular quarter— 
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‘‘(A) IN
GENERAL.—A corporation that 
fails to meet the requirements of subsection 
(b)(3) (other than a failure described in sub-
paragraph (B)(i)) for such quarter shall never-
theless be considered to have satisfied the re-
quirements of such subsection for such quarter 
if— 
‘‘(i) following the corporation’s identi-
fication of the failure to satisfy the re-
quirements of such subsection for such 
quarter, a description of each asset that 
causes the corporation to fail to satisfy the 
requirements of such subsection at the 
close of such quarter is set forth in a 
schedule for such quarter filed in the man-
ner provided by the Secretary, 
‘‘(ii) the failure to meet the require-
ments of such subsection for such quarter 
is due to reasonable cause and not due to 
willful neglect, and 
‘‘(iii)(I) the corporation disposes of 
the assets set forth on the schedule speci-
fied in clause (i) within 6 months after the 
last day of the quarter in which the cor-
poration’s identification of the failure to 
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satisfy the requirements of such subsection 
occurred or such other time period pre-
scribed by the Secretary and in the manner 
prescribed by the Secretary, or 
‘‘(II) the requirements of such sub-
section are otherwise met within the time 
period specified in subclause (I). 
‘‘(B) RULE
FOR
CERTAIN
DE
MINIMIS 
FAILURES.—A corporation that fails to meet 
the requirements of subsection (b)(3) for such 
quarter shall nevertheless be considered to have 
satisfied the requirements of such subsection 
for such quarter if— 
‘‘(i) such failure is due to the owner-
ship of assets the total value of which does 
not exceed the lesser of— 
‘‘(I) 1 percent of the total value 
of the corporation’s assets at the end 
of the quarter for which such meas-
urement is done, or 
‘‘(II) $10,000,000, and 
‘‘(ii)(I) the corporation, following the 
identification of such failure, disposes of 
assets in order to meet the requirements of 
such subsection within 6 months after the 
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last day of the quarter in which the cor-
poration’s identification of the failure to 
satisfy the requirements of such subsection 
occurred or such other time period pre-
scribed by the Secretary and in the manner 
prescribed by the Secretary, or 
‘‘(II) the requirements of such sub-
section are otherwise met within the time 
period specified in subclause (I). 
‘‘(C) TAX.— 
‘‘(i) TAX IMPOSED.—If subparagraph 
(A) applies to a corporation for any quar-
ter, there is hereby imposed on such cor-
poration a tax in an amount equal to the 
greater of— 
‘‘(I) $50,000, or 
‘‘(II) the amount determined 
(pursuant to regulations promulgated 
by the Secretary) by multiplying the 
net income generated by the assets 
described in the schedule specified in 
subparagraph (A)(i) for the period 
specified in clause (ii) by the highest 
rate of tax specified in section 11. 
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‘‘(ii) PERIOD.—For purposes of clause 
(i)(II), the period described in this clause 
is the period beginning on the first date 
that the failure to satisfy the requirements 
of subsection (b)(3) occurs as a result of 
the ownership of such assets and ending on 
the earlier of the date on which the cor-
poration disposes of such assets or the end 
of the first quarter when there is no longer 
a failure to satisfy such subsection. 
‘‘(iii) ADMINISTRATIVE PROVISIONS.— 
For purposes of subtitle F, a tax imposed 
by this subparagraph shall be treated as 
an excise tax with respect to which the de-
ficiency 
procedures 
of 
such 
subtitle 
apply.’’. 
(b) GROSS INCOME TEST.—Section 851 is amended 
by adding at the end the following new subsection: 
‘‘(i) FAILURE TO SATISFY GROSS INCOME TEST.— 
‘‘(1) DISCLOSURE REQUIREMENT.—A corpora-
tion that fails to meet the requirement of paragraph 
(2) of subsection (b) for any taxable year shall nev-
ertheless be considered to have satisfied the require-
ment of such paragraph for such taxable year if— 
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ported amount equals or exceeds the 
excess reported amount for such tax-
able year, subclause (I) shall be ap-
plied by substituting ‘post-December 
reported amount’ for ‘aggregate re-
ported amount’ and no excess re-
ported amount shall be allocated to 
any dividend paid on or before De-
cember 31 of such taxable year. 
‘‘(iv) DEFINITIONS.—For purposes of 
this subparagraph— 
‘‘(I) REPORTED
EXEMPT-INTER-
EST
DIVIDEND
AMOUNT.—The term 
‘reported 
exempt-interest 
dividend 
amount’ means the amount reported 
to its shareholders under clause (i) as 
an exempt-interest dividend. 
‘‘(II) 
EXCESS
REPORTED 
AMOUNT.—The term ‘excess reported 
amount’ means the excess of the ag-
gregate reported amount over the ex-
empt interest of the company for the 
taxable year. 
‘‘(III) 
AGGREGATE
REPORTED 
AMOUNT.—The term ‘aggregate re-
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