(a) In general

Part III of subchapter O of chapter 1 of the Internal Revenue Code of 1986 is amended by inserting after section 1045 the following new section:

1046. Reinvested capital gain dividends of regulated investment companies

(a) Nonrecognition of gain

In the case of an individual, 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) Definitions and special rules

For purposes of this section—

(1) Capital gain dividend

The term capital gain dividend has the meaning given to such term by section 852(b)(3)(C).

(2) Recognition of deferred capital gain dividends

(A) In general

Gain treated as unrecognized in accordance with subsection (a) shall be recognized in accordance with subparagraph (B)—

(i)

upon a subsequent sale or redemption by such individual of stock in the distributing company, or

(ii)

upon the death of the individual.

(B) Gain recognition

(i) In general

Upon a sale or redemption described in subparagraph (A), the taxpayer shall recognize that portion of total gain treated as unrecognized in accordance with subsection (a) (and not previously recognized pursuant to this subparagraph) that is equivalent to the portion of the taxpayer’s shares in the distributing company that are sold or redeemed.

(ii) Death of individual

Except as provided by regulations, any portion of such total gain not recognized under clause (i) prior to the taxpayer’s death shall be recognized upon the death of the taxpayer and included in the taxpayer’s gross income for the taxable year ending on the date of the taxpayer’s death.

(3) Holding period

The taxpayer’s holding period in shares acquired through reinvestment of a capital gain dividend to which subsection (a) applies shall be determined by treating the shareholder as having held such shares for one year and a day as of the date such shares are acquired.

(c) Section not To apply to certain taxpayers

This section shall not apply 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.

(d) Regulations

The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section.

(b) Conforming amendments

(c) Effective date

The amendments made by this section shall apply to taxable years ending after the date of the enactment of this Act.