indebtedness issued by a domestic corporation
of a type offered by corporations to the public,
‘‘(4) interest on obligations of the United
States, a State, or a political subdivision of a State
(not excluded from gross income of the taxpayer
under any other provision of law), and
‘‘(5) interest attributable to participation shares
in a trust established and maintained by a corpora-
tion established pursuant to Federal law.
‘‘(d) SPECIAL RULES.—For purposes of this sec-
tion—
‘‘(1) DISTRIBUTIONS
FROM
REGULATED
IN-
VESTMENT COMPANIES AND REAL ESTATE INVEST-
MENT TRUSTS.—Subsection (a) shall apply with re-
spect to distributions by—
‘‘(A) regulated investment companies to
the extent provided in section 854(c), and
‘‘(B) real estate investment trusts to the
extent provided in section 857(c).
‘‘(2) DISTRIBUTIONS BY A TRUST.—For pur-
poses of subsection (a), the amount of dividends and
interest properly allocable to a beneficiary under sec-
tion 652 or 662 shall be deemed to have been re-
ceived by the beneficiary ratably on the same date
that the dividends and interest were received by the
estate or trust.
‘‘(3) CERTAIN
NONRESIDENT
ALIENS
INELI-
GIBLE
FOR
EXCLUSION.—In the case of a non-
resident alien individual, subsection (a) shall apply
only—
‘‘(A) in determining the tax imposed for
the taxable year pursuant to section 871(b)(1)
and only in respect of dividends and interest
which are effectively connected with the conduct
of a trade or business within the United States,
or
‘‘(B) in determining the tax imposed for
the taxable year pursuant to section 877(b).’’.
(b) CONFORMING AMENDMENTS.—
(1) The table of sections for part III of sub-
chapter B of chapter 1 of such Code is amended by
inserting after the item relating to section 115 the
following new item:
‘‘Sec. 116. Partial exclusion of dividends and interest received by
individuals.’’.
(2) Paragraph (2) of section 265(a) of such
Code is amended by inserting before the period at
the end the following: ‘‘, or to purchase or carry ob-
ligations or shares, or to make deposits, to the ex-
tent the interest thereon is excludable from gross in-
come under section 116’’.
(3) Subsection (c) of section 584 of such Code
is amended by adding at the end the following new
flush sentence:
‘‘The proportionate share of each participant in the
amount of dividends or interest received by the common
trust fund and to which section 116 applies shall be con-
sidered for purposes of such section as having been re-
ceived by such participant.’’.
(4) Subsection (a) of section 643 of such Code
is amended by redesignating paragraph (7) as para-
graph (8) and by inserting after paragraph (6) the
following new paragraph:
‘‘(7) DIVIDENDS OR INTEREST.—There shall be
included the amount of any dividends or interest ex-
cluded from gross income pursuant to section 116.’’.
(5) Section 854 of such Code is amended by
adding at the end the following new subsection:
‘‘(c) TREATMENT UNDER SECTION 116.—
‘‘(1) IN
GENERAL.—For purposes of section
116, in the case of any dividend (other than a divi-
dend described in subsection (a)) received from a
regulated investment company which meets the re-
quirements of section 852 for the taxable year in
which it paid the dividend—
‘‘(A) the entire amount of such dividend
shall be treated as a dividend if the sum of the
aggregate dividends and the aggregate interest
received by such company during the taxable
year equals or exceeds 75 percent of its gross
income, or
‘‘(B) if subparagraph (A) does not apply,
there shall be taken into account under section
116 only the portion of such dividend which
bears the same ratio to the amount of such div-
idend as the sum of the aggregate dividends re-
ceived and aggregate interest received bears to
gross income.
For purposes of the preceding sentence, gross in-
come and aggregate interest received shall each be
reduced by so much of the deduction allowable by
section 163 for the taxable year as does not exceed
aggregate interest received for the taxable year.
‘‘(2) NOTICE TO SHAREHOLDERS.—The amount
of any distribution by a regulated investment com-
pany which may be taken into account as a dividend
for purposes of the exclusion under section 116 shall
not exceed the amount so designated by the com-
pany in a written notice to its shareholders mailed
not later than 60 days after the close of its taxable
year.
‘‘(3) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) The term ‘gross income’ does not in-
clude gain from the sale or other disposition of
stock or securities.
‘‘(B) The term ‘aggregate dividends’ in-
cludes only dividends received from domestic
corporations other than dividends described in
section 116(b)(2). In determining the amount
of any dividend for purposes of this subpara-
graph, the rules provided in section 116(d)(1)
(relating to certain distributions) shall apply.
‘‘(C) The term ‘interest’ has the meaning
given such term by section 116(c).’’.
(6) Subsection (c) of section 857 of such Code
is amended to read as follows:
‘‘(c) LIMITATIONS APPLICABLE TO DIVIDENDS RE-
CEIVED FROM REAL ESTATE INVESTMENT TRUSTS.—
‘‘(1) IN
GENERAL.—For purposes of section
116 (relating to an exclusion for dividends and inter-
est received by individuals) and section 243 (relating
to deductions for dividends received by corpora-