[Code of Federal Regulations]
[Title 26, Volume 9]
[Revised as of April 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.857-2]

[Page 76-77]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.857-2  Real estate investment trust taxable income and net capital gain.

    (a) Real estate investment trust taxable income. Section 857(b)(1) 
imposes a nominal tax and surtax, computed at the rates and in the 
manner prescribed in section 11, on the ``real estate investment trust 
taxable income'', as defined in section 857(b)(2). Section 857(b)(2) 
requires certain adjustments to be made to convert taxable income of the 
real estate investment trust to ``real estate investment trust taxable 
income''. The adjustments are as follows:
    (1) Net capital gain. In the case of taxable years ending before 
October 5, 1976, the net capital gain, if any, is excluded.
    (2) Special deductions disallowed. The special deductions provided 
in part VIII, subchapter B, chapter 1 of the Code (except the deduction 
under section 248) are not allowed.
    (3) Deduction for dividends paid--(i) General rule. The deduction 
for dividends paid (as defined in section 561) is allowed. In the case 
of taxable years ending before October 5, 1976, the deduction for 
dividends paid is computed without regard to capital gains dividends.
    (ii) Deduction for dividends paid if there is net income from 
foreclosure property. If for any taxable year the trust has net income 
from foreclosure property (as defined in section 857(b)(4)(B) and 
Sec. 1.857-3), the deduction for dividends paid is an amount equal to 
the amount which bears the same proportion to the total dividends paid 
or considered as paid during the taxable year that otherwise meet the 
requirements for the deduction for dividends paid (as defined in section 
561) as the real estate investment trust taxable income (determined 
without regard to the deduction for dividends paid) bears to the sum of-
-
    (A) The real estate investment trust taxable income (determined 
without regard to the deduction for dividends paid), and
    (B) The amount by which the net income from foreclosure property 
exceeds the tax imposed on such income by section 857(b)(4)(A).

For purposes of the preceding sentence, the term ``total dividends paid 
or considered as paid during the taxable year'' includes deficiency 
dividends paid with respect to the taxable year that are not otherwise 
excluded under this subdivision or section 857(b)(3)(A). The term, 
however, does not include either deficiency dividends paid during the 
taxable year with respect to a preceding taxable year ending before 
October 5, 1976, capital gains dividends.
    (iii) Deduction for dividends paid for purposes of the alternative 
tax. The rules in section 857(b)(3)(A) apply in determining the amount 
of the deduction for dividends paid that is taken into account in 
computing the alternative tax. Thus, for example, if a real estate 
investment trust has net income from foreclosure property for a taxable 
year ending after October 4, 1976, then for purposes of determining the 
partial tax described in section 857(b)(3)(A)(i), the amount of the 
deduction for dividends paid is computed pursuant to paragraph 
(a)(3)(ii) of this section, except that capital gains dividends are 
excluded from the dividends paid or considered as paid during the 
taxable year, and the net capital gain is excluded in computing real 
estate investment trust taxable income.
    (4) Section 443(b) disregarded. The taxable income is computed 
without regard to seciton 443(b). Thus, the taxable income for a period 
of less than 12 months is not placed on an annual basis even though the 
short taxable year results from a change of accounting period.

[[Page 77]]

    (5) Net operating loss deduction. In the case of a taxable year 
ending before October 5, 1976, the net operating loss deduction provided 
in section 172 is not allowed.
    (6) Net income from foreclosure property. An amount equal to the net 
income from foreclosure property (as defined in section 857(b)(4)(B) and 
paragraph (a) of Sec. 1.857-3), if any, is excluded.
    (7) Tax imposed by section 857(b)(5). An amount equal to the tax (if 
any) imposed on the trust by section 857(b)(5) for the taxble year is 
excluded.
    (8) Net income or loss from prohibited transactions. An amount equal 
to the amount of any net income derived from prohibited transactions (as 
defined in section 857(b)(6)(B)(i)) is excluded. On the other hand, an 
amount equal to amount of any net loss derived from prohibited 
transactions (as defined in section 857(b)(6)(B)(ii)) is included. 
Because the amount of the net loss derived from prohibited transactions 
is taken into account in computing taxable income before the adjustments 
required by section 857(b)(2) and this section are made, the effect of 
including an amount equal to the amount of the loss is to disallow a 
deduction for the loss.
    (b) Net capital gain in taxable years ending October 5, 1976. The 
rules relating to the taxation of capital gains in 26 CFR 1.857-2(b) 
(revised as of April 1, 1977) apply to taxable years ending before 
October 5, 1976.

(Sec. 856(d)(4) (90 Stat. 1750; 26 U.S.C. 856(d)(4)); sec. 856(e)(5) (88 
Stat. 2113; 26 U.S.C. 856(e)(5)); sec. 856(f)(2) (90 Stat. 1751; 26 
U.S.C. (856(f)(2)); sec. 856(g)(2) (90 Stat. 1753; 26 U.S.C. 856(g)(2)); 
sec. 858(a) (74 Stat. 1008; 26 U.S.C. 858(a)); sec. 859(c) (90 Stat. 
1743; 26 U.S.C. 859(c)); sec. 859(e) (90 Stat. 1744; 26 U.S.C. 859(e)); 
sec. 6001 (68A Stat. 731; 26 U.S.C. 6001); sec. 6011 (68A Stat. 732; 26 
U.S.C. 6011); sec. 6071 (68A Stat. 749, 26 U.S.C. 6071); sec. 6091 (68A 
Stat. 752; 26 U.S.C. 6091); sec. 7805 (68A Stat. 917; 26 U.S.C. 7805), 
Internal Revenue Code of 1954))

[T.D. 7767, 46 FR 11277, Feb. 6, 1981]