United States Code

lated investment company for a taxable year unless

(1) the deduction for dividends paid during the taxable year (as defined in section 561, but without regard to capital gains dividends) equals or exceeds 90 percent of its investment company taxable income for the taxable year (determined without regard to subsection (b) (2) (D)), and

(2) the investment company complies for such year with regulations prescribed by the Secretary or his delegate for the purpose of ascertaining the actual ownership of its outstanding stock.

(b) Method of taxation of companies and shareholders.

(1) Imposition of normal tax and surtax on regulated investment companies.

There is hereby imposed for each taxable year upon the investment company taxable income of every regulated investment company a normal tax and surtax computed as provided in section 11, as though the investment company taxable income were the taxable income referred to in section 11. For purposes of computing the normal tax under section 11, the taxable income and the dividends paid deduction of such investment company for the taxable year (computed without regard to capital gains dividends) shall be reduced by the deduction provided by section 242 (relating to partially tax-exempt interest).

(2) Investment company taxable income.

The investment company taxable income shall be the taxable income of the regulated investment company adjusted as follows:

(A) There shall be excluded the excess, if any, of the net long-term capital gain over the net short-term capital loss.

(B) The net operating loss deduction provided in section 172 shall not be allowed.

(C) The deductions for corporations provided in part VIII (except section 248) in subchapter B (section 241 and following, relating to the deduction for dividends received, etc.) shall not be allowed.

(D) The deduction for dividends paid (as defined in section 561) shall be allowed, but shall be computed without regard to capital gains dividends.

(E) The taxable income shall be computed without regard to section 443 (b) (relating to computation of tax on change of annual accounting period).

(3) Capital gains.

(A) Imposition of tax.

There is hereby imposed for each taxable year in the case of every regulated investment company a tax of 25 percent of the excess, if any, of the net long-term capital gain over the sum of

(i) the net short-term capital loss, and (ii) the deduction for dividends paid (as defined in section 561) determined with reference to capital gains dividends only. (B) Treatment of capital gain dividends by shareholders.

A capital gain dividend shall be treated by the shareholders as a gain from the sale or ex36-500 0-65-vol. 633

change of a capital asset held for more than 6 months.

For purposes of this part, a capital gain dividend is any dividend, or part thereof, which is designated by the company as a capital gain dividend in a written notice mailed to its shareholders not later than 45 days after the close of its taxable year. If the aggregate amount so designated with respect to a taxable year of the company (including capital gains dividends paid after the close of the taxable year described in section 855) is greater than the excess of the net long-term capital gain over the net shortterm capital loss of the taxable year, the portion of each distribution which shall be a capital gain dividend shall be only that proportion of the amount so designated which such excess of the net long-term capital gain over the net shortterm capital loss bears to the aggregate amount so designated.

(D) Treatment by shareholders of undistributed capital gains.

(i) Every shareholder of a regulated investment company at the close of the company's taxable year shall include, in computing his long-term capital gains in his return for his taxable year in which the last day of the company's taxable year falls, such amount as the company shall designate in respect of such shares in a written notice mailed to its shareholders at any time prior to the expiration of 45 days after close of its taxable year, but the amount so includible by any shareholder shall not exceed that part of the amount subjected to tax in subparagraph (A) which he would have received if all of such amount had been distributed as capital gain dividends by the company to the holders of such shares at the close of its taxable year.

(ii) For purposes of this title, every such shareholder shall be deemed to have paid, for his taxable year under clause (i), the tax of 25 percent imposed by subparagraph (A) on the amounts required by this subparagraph to be included in respect of such shares in computing his long-term capital gains for that year; and such shareholder shall be allowed credit or refund, as the case may be, for the tax so deemed to have been paid by him.

(iii) The adjusted basis of such shares in the hands of the shareholder shall be increased by 75 percent of the amounts required by this subparagraph to be included in computing his long-term capital gains.

(iv) In the event of such designation the tax imposed by subparagraph (A) shall be paid by the regulated investment company within 30 days after close of its taxable year.

(v) The earnings and profits of such regulated investment company, and the earnings and profits of any such shareholder which is a corporation, shall be appropriately adjusted in accordance with regulations prescribed by the Secretary or his delegate.

(4) Loss on sale or exchange of stock held less than 31 days.

(A) under subparagraph (B) or (D) of paragraph (3) a shareholder of a regulated investment company is required, with respect to any share, to treat any amount as a long-term capital gain, and

(B) such share is held by the taxpayer for less than 31 days,

then any loss on the sale or exchange of such share shall, to the extent of the amount described in subparagraph (A) of this paragraph, be treated as loss from the sale or exchange of a capital asset held for more than 6 months. For purposes of this paragraph, the rules of section 246 (c) (3) shall apply in determining whether any share of stock has been held for less than 31 days; except that "30 days" shall be substituted for the number of days specified in subparagraph (B) of section 246 (c) (3).

The earnings and profits of a regulated investment company for any taxable year (but not its accumulated earnings and profits) shall not be reduced by any amount which is not allowable as a deduction in computing its taxable income for such taxable year. For purposes of this subsection, the term "regulated investment company" includes a domestic corporation which is a regulated investment company determined without regard to the requirements of subsection (a).

(d) Distributions in redemption of interests in unit investment trusts.

In the case of a unit investment trust

(1) which is registered under the Investment Company Act of 1940 and issues periodic payment plan certificates (as defined in such Act), and

(2) substantially all of the assets of which consist of securities issued by a management company (as defined in such Act),

section 562 (c) (relating to preferential dividends) shall not apply to a distribution by such trust to a holder of an interest in such trust in redemption of part of all of such interest, with respect to the net capital gain of such trust attributable to such redemption. (Aug. 16, 1954, ch. 736, 68A Stat. 271; July 11, 1956, ch. 573, § 2(a), 70 Stat. 530; Sept. 2, 1958, Pub. L. 85-866, title I, §§ 39(a), 101(a), (b), 72 Stat. 1638, 1674; Sept. 14, 1960, Pub. L. 86-779, § 10(b) (2),(3), 74 Stat. 1009; Feb. 26, 1964, Pub. L. 88-272, title I, § 229(a) (1), (2), (b), 78 Stat. 99.)

REFERENCES IN TEXT

The Investment Company Act of 1940, referred to in subsec. (d), is classified to section 80a-1 et seq. of Title 15, Commerce and Trade.

AMENDMENTS

1964 Subsec. (b) (3) (C), (D)(1). Pub. L. 88-272, § 229 (a) (1), (2), substituted "45 days" for "30 days" in pars. (C) and (D) (i).

Subsec. (d). Pub. L. 88-272, § 229 (b), added subsec. (d).

1960 Subsec. (a). Pub. L. 86-779, § 10(b) (2), substituted "this part" for "this subchapter."

Subsec. (b)(3)(C). Pub. L. 86-779, § 10(b) (3), substituted "For purposes of this part, a capital gain dividend is" for “A capital gain dividend means.”

1958-Subsec. (a). Pub. L. 85-866, § 101(a), inserted "(other than subsection (c) of this section)". Subsec. (b) (4). Pub. L. 85-866, § 39 (a), added subsec. (b) (4).

Subsec. (c). Pub. L. 85-866, § 101 (b), added sentence defining regulated investment company.

1956 Subsec. (b) (3) (D). Act July 11, 1956, added subsec. (b) (3) (D).

EFFECTIVE Date of 1964 AMENDMENT

Section 229 (c) of Pub. L. 88-272 provided that: "The amendments made by subsection (a) [to subsec. (b) of this section, and sections 853, 854(b) (2), and 855 of this title] shall apply to taxable years of regulated investment companies ending on or after the date of the enactment of this Act [Feb. 26, 1964]. The amendment made by subsection (b) [adding subsec. (d) of this section] shall apply to taxable years of regulated investment companies ending after December 31, 1963."

EFFECTIVE DATE OF 1960 AMENDMENT

Amendment of section by Pub. L. 86-779 applicable with respect to taxable years of real estate investment trusts beginning after Dec. 31, 1960, see section 10(k) of Pub. L. 86-779, set out as a note under section 856 of this title.

EFFECTIVE DATE OF 1958 AMENDMENT

Section 39 (b) of Pub. L. 85-866 provided that: "The amendment made by subsection (a) [adding subsec. (b) (4) of this section] shall apply with respect to taxable years ending after December 31, 1957, but only with respect to shares of stock acquired after December 31, 1957." Section 101 (c) of Pub. L. 85-866 provided that: "The amendments made by this section [to subsecs. (a) and (c) of this section] shall apply with respect to taxable years of regulated investment companies beginning on or after March 1, 1958."

EFFECTIVE DATE of 1956 AMENDMENT

Section 2 (b) of act July 11, 1956, provided that amendment adding subpar. (D) to subsec. (b) (3) should apply only with respect to taxable years of regulated investment companies beginning after Dec. 31, 1956.

CROSS REFERENCES

Doubling of tax rate on citizens and corporations of certain foreign countries, see section 891 of this title.

§ 853. Foreign tax credit allowed to shareholders. (a) General rule.

A regulated investment company

(1) more than 50 percent of the value (as defined in section 851 (c) (4)) of whose total assets at the close of the taxable year consists of stock or securities in foreign corporations, and

(2) which meets the requirements of section 852 (a) for the taxable year,

may, for such taxable year, elect the application of this section with respect to income, war profits, and excess profits taxes described in section 901 (b) (1), which are paid by the investment company during such taxable year to foreign countries and possessions of the United States.

(b) Effect of election.

If the election provided in subsection (a) is effective for a taxable year

(1) the regulated investment company—

(A) shall not, with respect to such taxable year, be allowed a deduction under section 164 (a) or a credit under section 901 for taxes to which subsection (a) is applicable, and

(B) shall be allowed as an addition to the dividends paid deduction for such taxable year the amount of such taxes;

(2) each shareholder of such investment company shall—

(A) include in gross income and treat as paid by him his proportionate share of such taxes, and

(B) treat as gross income from sources within the respective foreign countries and possessions of the United States, for purposes of applying subpart A of part III of subchapter N, the sum of his proportionate share of such taxes and the portion of any dividend paid by such investment company which represents income derived from sources within foreign countries or possessions of the United States.

The amounts to be treated by the shareholder, for purposes of subsection (b) (2), as his proportionate share of

(1) taxes paid to any foreign country or possession of the United States, and

(2) gross income derived from sources within any foreign country or possession of the United States,

shall not exceed the amounts so designated by the company in a written notice mailed to its shareholders not later than 45 days after the close of its taxable year.

(d) Manner of making election and notifying shareholders.

The election provided in subsection (a) and the notice to shareholders required by subsection (c) shall be made in such manner as the Secretary or his delegate may prescribe by regulations.

(B) the aggregate dividends received by such company during such taxable year are less than 75 percent of its gross income, then, in computing the exclusion under section 116 and the deduction under section 243, there shall be taken into account only that portion of the dividend which bears the same ratio to the amount of such dividend as the aggregate dividends received by such company during such taxable year bear to its gross income for such taxable year.

(2) Notice to shareholders.

The amount of any distribution by a regulated investment company which may be taken into account as a dividend for purposes of the exclusion under section 116 and the deduction under section 243 shall not exceed the amount so designated by the company in a written notice to its shareholders mailed not later than 45 days after the close of its taxable year.

(3) Definitions.

For purposes of this subsection

(A) The term "gross income" does not include gain from the sale or other disposition of stock or securities.

(B) The term "aggregate dividends received" includes only dividends received from domestic corporations other than dividends described in section 116 (b) (relating to dividends excluded from gross income). In determining the amount of any dividend for purposes of this subparagraph, the rules provided in section 116 (c) (relating to certain distributions) shall apply.

(Aug. 16, 1954, ch. 736, 68A Stat. 273; Feb. 26, 1964, Pub. L. 88-272, title II, §§ 201(d) (8)—(10), 229 (a) (4), 78 Stat. 32, 99.)

AMENDMENTS

1964 Subsec. (a). Pub. L. 88-272, § 201(d) (8), deleted "section 34(a) (relating to credit for dividends received by individuals)," preceding "section 116."

Subsec. (b). Pub. L. 88–272, §§ 201 (d) (9), (10), 229 (a) (4), substituted "45 days" for "30 days" in par. (2), and deleted "the credit under section 34(a)," preceding "the exclusion" in par. (1), and "the credit under section 34," preceding "the exclusion" in par. (2).

EFFECTIVE DATE OF 1964 AMENDMENT Amendment of subsecs. (a), (b) (1), (2), by Pub. L. 88-272, applicable to dividends received after Dec. 31, 1964, in taxable years ending after such date, see section 201(e) of Pub. L. 88-272, set out as a note under section 35 of this title.

Amendment of subsec. (b)(2) by Pub. L. 88-272 applicable to taxable years of regulated investment companies ending on or after Feb. 26, 1964, see section 229 (c) of Pub. L. 88-272, set out as a note under section 852 of this title.

§ 855. Dividends paid by regulated investment company after close of taxable year. (a) General rule.

For purposes of this chapter, if a regulated investment company

(1) declares a dividend prior to the time prescribed by law for the filing of its return for a taxable year (including the period of any extension of time granted for filing such return), and

(2) distributes the amount of such dividend to shareholders in the 12-month period following the close of such taxable year and not later than

the date of the first regular dividend payment made after such declaration,

the amount so declared and distributed shall, to the extent the company elects in such return in accordance with regulations prescribed by the Secretary or his delegate, be considered as having been paid during such taxable year, except as provided in subsections (b), (c) and (d).

(b) Receipt by shareholder.

Amounts to which subsection (a) is applicable shall be treated as received by the shareholder in the taxable year in which the distribution is made.

In the case of amounts to which subsection (a) is applicable, any notice to shareholders required under this part with respect to such amounts shall be made not later than 45 days after the close of the taxable year in which the distribution is made. (d) Foreign tax election.

If an investment company to which section 853 is applicable for the taxable year makes a distribution as provided in subsection (a) of this section, the shareholders shall consider the amounts described in section 853 (b) (2) allocable to such distribution as paid or received, as the case may be, in the taxable year in which the distribution is made. (Aug. 16, 1954, ch. 736, 68A Stat. 274; Sept. 14, 1960, Pub. L. 86-779, § 10(b) (2), 74 Stat. 1009; Feb. 26, 1964, Pub. L. 88-272, title II, § 229 (a) (5), 78 Stat. 99.)

1964

AMENDMENTS

Subsec. (c). Pub. L. 88-272 substituted "45 days" for "30 days."

1960- Subsec. (c). Pub. L. 86-779 substituted "this part" for "this subchapter."

EFFECTIVE DATE OF 1964 AMENDMENT Amendment of section by Pub. L. 88-272 applicable to taxable years of regulated investment companies ending on or after Feb. 26, 1964, see section 229 (c) of Pub. L. 88-272, set out as a note under section 852 of this title.

EFFECTIVE Date of 1960 AMENDMENT

Sec.

PART II.-REAL ESTATE INVESTMENT TRUSTS

856. Definition of real estate investment trust.

857. Taxation of real estate investment trusts and their beneficiaries.

858. Dividends paid by real estate investment trust after close of taxable year.

AMENDMENTS

1960-Pub. L. 86-779, § 10(a), Sept. 14, 1960, 74 Stat. 1003, added Part II analysis.

§ 856. Definition of real estate investment trust. (a) In general.

For purposes of this subtitle, the term "real estate investment trust" means an unincorporated trust or an unincorporated association—

(1) which is managed by one or more trustees; (2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;

(3) which (but for the provisions of this part) would be taxable as a domestic corporation;

(4) which does not hold any property primarily for sale to customers in the ordinary course of its trade or business;

(5) the beneficial ownership of which is held by 100 or more persons;

(6) which would not be a personal holding company (as defined in section 542) if all of its adjusted ordinary gross income (as defined in section 543(b) (2)) constituted personal holding company income (as defined in section 543); and

(7) which meets the requirements of subsection (c).

(b) Determination of status.

The conditions described in paragraphs (1) to (4), inclusive, of subsection (a) must be met during the entire taxable year, and the condition described in paragraph (5) must exist during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months.

A trust or association shall not be considered a real estate investment trust for any taxable year unless

(1) it files with its return for the taxable year an election to be a real estate investment trust or has made such election for a previous taxable year which began after December 31, 1960; (2) at least 90 percent of its gross income is derived from

(A) dividends;
(B) interest;

(D) gain from the sale or other disposition of stock, securities, and real property (including interests in real property and interests in mortgages on real property); and

(E) abatements and refunds of taxes on real property;

(3) at least 75 percent of its gross income is derived from

(A) rents from real property;

(B) interest on obligations secured by mortgages on real property or on interests in real property;

(C) gain from the sale or other disposition of real property (including interests in real property and interests in mortgages on real property);

(D) dividends or other distributions on, and gain from the sale or other disposition of, transferable shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part; and

(E) abatements and refunds of taxes on real property;

(4) less than 30 percent of its gross income is derived from the sale or other disposition of—

(A) stock or securities held for less than 6 months; and

(B) real property (including interests in real property) not compulsorily or involuntarily con

verted within the meaning of section 1033, held for less than 4 years; and

(5) at the close of each quarter of the taxable year-

(A) at least 75 percent of the value of its total assets is represented by real estate assets, cash and cash items (including receivables), and Government securities; and

(B) not more than 25 percent of the value of its total assets is represented by securities (other than those includible under subparagraph (A)) for purposes of this calculation limited in respect of any one issuer to an amount not greater in value than 5 percent of the value of the total assets of the trust and to not more than 10 percent of the outstanding voting securities of such issuer.

A real estate investment trust which meets the requirements of this paragraph at the close of any quarter shall not lose its status as a real estate investment trust because of a discrepancy during a subsequent quarter between the value of its various investments and such requirements unless such discrepancy exists immediately after the acquisition of any security or other property and is wholly or partly the result of such acquisition. A real estate investment trust which does not meet such requirements at the close of any quarter by reason of a discrepancy existing immediately after the acquisition of any security or other property which is wholly or partly the result of such acquisition during such quarter shall not lose its status for such quarter as a real estate investment trust if such discrepancy is eliminated within 30 days after the close of such quarter and in such cases it shall be considered to have met such requirements at the close of such quarter for purposes of applying the preceding sentence. (6) For purposes of this part

(A) The term "value" means, with respect to securities for which market quotations are readily available, the market value of such securities; and with respect to other securities and assets, fair value as determined in good faith by the trustees, except that in the case of securities of real estate investment trusts such fair value shall not exceed market value or asset value, whichever is higher.

(B) The term "real estate assets" means real property (including interests in real property and interests in mortgages on real property) and shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part.

(C) The term "interests in real property" includes fee ownership and co-ownership of land or improvements thereon and leaseholds of land or improvements thereon, but does not include mineral, oil, or gas royalty interests.

(D) All other terms shall have the same meaning as when used in the Investment Company Act of 1940, as amended.

(d) Rents from real property defined.

For purposes of paragraphs (2) and (3) of subsection (c), the term "rents from real property" in

cludes rents from interests in real property but does not include

(1) any amount received or accrued, directly or indirectly, with respect to any real property, if the determination of such amount depends in whole or in part on the income or profits derived by any person from such property (except that any amount so received or accrued shall not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts or sales);

(2) any amount received or accrued directly or indirectly from any person if the real estate investment trust owns, directly or indirectly

(A) in the case of any person which is a corporation, stock of such person possessing 10 percent or more of the total combined voting power of all classes of stock entitled to vote, or 10 percent or more of the total number of shares of all classes of stock of such person; or

(B) in the case of any person which is not a corporation, an interest of 10 percent or more in the assets or net profits of such person; and

(3) any amount received or accrued, directly or indirectly, with respect to any real property, if the real estate investment trust furnishes or renders services to the tenants of such property, or manages or operates such property, other than through an independent contractor from whom the trust itself does not derive or receive any income. For purposes of this paragraph, the term "independent contractor" means

(A) a person who does not own, directly or indirectly, more than 35 percent of the shares, or certificates of beneficial interest, in the real estate investment trust, or

(B) a person, if a corporation, not more than 35 percent of the total combined voting power of whose stock (or 35 percent of the total shares of all classes of whose stock), or, if not a corporation, not more than 35 percent of the interest in whose assets or net profits is owned, directly or indirectly, by one or more persons owning 35 percent or more of the shares or certificates of beneficial interest in the trust. For purposes of paragraphs (2) and (3), the rules prescribed by section 318(a) for determining the ownership of stock shall apply in determining the ownership of stock, assets, or net profits of any person; except that "10 percent" shall be substituted for "50 percent" in subparagraph (C) of sections 318(a) (2) and 318(a) (3). (Added Pub. L. 86-779, § 10(a), Sept. 14, 1960, 74 Stat. 1004, and amended Pub. L. 88-272, title II, § 225 (k) (4), Feb. 26, 1964, 78 Stat. 94; Pub. L. 88-554, § 4(b) (4), Aug. 31, 1964, 78 Stat. 763.)

REFERENCES IN TEXT

The Investment Company Act of 1940, as amended, referred to in subsec. (c) (6) (D), is classified to section 80a-1 et seq. of Title 15, Commerce and Trade.

AMENDMENTS

1964 Subsec. (a) (6). Pub. L. 88-272 substituted "adjusted ordinary gross income (as defined in section 543 (b) (2))" for "gross income."

Subsec. (d). Pub. L. 88-554 inserted the reference to subparagraph (C) of section 318 (a) (3) of this title.

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United States Code, Volume 6