A bill to amend the Internal Revenue Code of 1954 with respect to the tax treatment of small business investment companies electing to be taxed as regulated investment companies.

(Reported to House from the Committee on Ways and Means with amendment, H. Rept. 95-1537)

Amends the Internal Revenue Code to allow a tax deduction for the amount of any deficiency dividend resulting from any adjustment to any regulated investment company or real estate investment trust. Defines "deficiency dividend" to mean a distribution of property made by the qualified investment entity which would have been includible under the dividend deduction provisions of the Code for the taxable year that liability for the tax exists if distributed during such taxable year.

Provides that where, as a result of an IRS audit of a regulated investment company, an adjustment is to be made increasing the amount of dividends that such company must pay in order to distribute the required 90 percent of income, then such company may pay a deficiency dividend to its shareholders and receive a deduction for such distribution, and not be subject to tax on such distribution nor forego its tax status. States that an adjustment which will allow use of such deficiency dividend procedure is to include an increase in the excess of the net capital gains over the deduction for capital gain dividends paid. Makes such deficiency dividend deduction available only if the entire amount of the adjustment was not due to a fraud with intent to evade tax or for willful failure to file a return on time. Makes the amount of such deficiency dividend taxable to the shareholder for the taxable year in which the distribution is made.

Requires that the regular rate of interest be imposed on the amount of the deficiency dividend. Imposes an additional penalty equal to the interest charge, but not greater than 50 percent of the deficiency dividend.