[Code of Federal Regulations]
[Title 26, Volume 1]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.265-3]

[Page 569]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.265-3  Nondeductibility of interest relating to exempt-interest 
dividends.

    (a) In general. No deduction is allowed to a shareholder of a 
regulated investment company for interest on indebtedness that relates 
to exempt-interest dividends distributed by the company to the 
shareholder during the shareholder's taxable year.
    (b) Interest relating to exempt-interest dividends. (1) All or a 
portion of the interest on an indebtedness relates to exempt-interest 
dividends if the indebtedness is either incurred or continued to 
purchase or carry shares of stock of a regulated investment company that 
distributes exempt-interest dividends (as defined in section 852(b)(5) 
of the Code) to the holder of the shares during the shareholder's 
taxable year.
    (2) To determine the amount of interest that relates to the exempt-
interest dividends the total amount of interest paid or accrued on the 
indebtedness is multiplied by a fraction. The numerator of the fraction 
is the amount of exempt-interest dividends received by the shareholder. 
The denominator of the fraction is the sum of the exempt-interest 
dividends and taxable dividends received by the shareholder (excluding 
capital gain dividends received by the shareholder and capital gains 
required to be included in the shareholder's computation of long-term 
capital gains under section 852(b)(3)(D)).

[T.D. 7601, 44 FR 16013, Mar. 16, 1979]