termined without regard to this sec-
tion) exceeds the entity’s net capital 
gain for such year determined with re-
gard to this section, and 
‘‘(ii) there shall be other appropriate 
adjustments (including deemed distribu-
tions) so as to ensure that the benefits of 
this section are not allowed (directly or in-
directly) to corporate shareholders of quali-
fied investment entities. 
For purposes of the preceding sentence, any 
amount includible in gross income under section 
852(b)(3)(D) shall be treated as a capital gain 
dividend and an S corporation shall not be 
treated as a corporation. 
‘‘(C) 
EXCEPTION
FOR
QUALIFICATION 
PURPOSES.—This section shall not apply for 
purposes of sections 851(b) and 856(c). 
‘‘(D) EXCEPTION FOR CERTAIN TAXES IM-
POSED AT ENTITY LEVEL.— 
‘‘(i) TAX ON FAILURE TO DISTRIBUTE 
ENTIRE GAIN.—If any amount is subject to 
tax under section 852(b)(3)(A) for any 
taxable year, the amount on which tax is 
imposed under such section shall be in-
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ccoleman on PROD1PC71 with BILLS
creased by the percentage determined 
under subparagraph (B)(i)(II). A similar 
rule shall apply in the case of any amount 
subject to tax under paragraph (2) or (3) 
of section 857(b) to the extent attributable 
to the excess of the net capital gain over 
the deduction for dividends paid deter-
mined with reference to capital gain divi-
dends only. The first sentence of this 
clause shall not apply to so much of the 
amount subject to tax under section 
852(b)(3)(A) as is designated by the com-
pany under section 852(b)(3)(D). 
‘‘(ii) OTHER
TAXES.—This section 
shall not apply for purposes of determining 
the amount of any tax imposed by para-
graph (4), (5), or (6) of section 857(b). 
‘‘(2) ADJUSTMENTS
TO
INTERESTS
HELD
IN 
ENTITY.— 
‘‘(A) REGULATED
INVESTMENT
COMPA-
NIES.—Stock in a regulated investment com-
pany (within the meaning of section 851) shall 
be an indexed asset for any calendar quarter in 
the same ratio as— 
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‘‘(i) the average of the fair market 
values of the indexed assets held by such 
company at the close of each month during 
such quarter, bears to 
‘‘(ii) the average of the fair market 
values of all assets held by such company 
at the close of each such month. 
‘‘(B) 
REAL
ESTATE
INVESTMENT 
TRUSTS.—Stock in a real estate investment 
trust (within the meaning of section 856) shall 
be an indexed asset for any calendar quarter in 
the same ratio as— 
‘‘(i) the fair market value of the in-
dexed assets held by such trust at the close 
of such quarter, bears to 
‘‘(ii) the fair market value of all as-
sets held by such trust at the close of such 
quarter. 
‘‘(C) RATIO OF 80 PERCENT OR MORE.—If 
the ratio for any calendar quarter determined 
under subparagraph (A) or (B) would (but for 
this subparagraph) be 80 percent or more, such 
ratio for such quarter shall be 100 percent. 
‘‘(D) RATIO OF 20 PERCENT OR LESS.—If 
the ratio for any calendar quarter determined 
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