[Code of Federal Regulations]
[Title 26, Volume 9]
[Revised as of April 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.860-2]

[Page 88-90]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.860-2  Requirements for deficiency dividends.

    (a) In general--(1) Determination, etc. A qualified investment 
entity is allowed a deduction for a deficiency dividend only if there is 
a determination (as defined in section 860(e) and paragraph (b)(1) of 
this section) that results in an adjustment (as defined in section 
860(d) (1) or (2)) for the taxable year for which the deficiency 
dividend is paid. An adjustment does not include an increase in the 
excess of (i) the taxpayer's interest income excludable from gross 
income under section 103(a) over (ii) its deductions disallowed under 
sections 265 and 171(a)(2).
    (2) Payment date and claim. The deficiency dividend must be paid on, 
or within 90 days after, the date of the determination and before the 
filing of a claim under section 860(g) and paragraph (b)(2) of this 
section. This claim must be filed within 120 days after the date of the 
determination.
    (3) Nature and amount of distribution. (i) The deficiency dividend 
must be a distribution of property (including money) that would have 
been properly taken into account in computing the dividends paid 
deduction under section 561 for the taxable year for which tax liability 
resulting from the determination exists if the property had been 
distributed during that year. Thus, if the distribution would have been 
a dividend under section 316(a) if it had been made during the taxable 
year for which the determination applies, and the distribution may 
qualify under sections 316(b)(3), 562(a), and 860(f)(1), even though the 
distributing corporation, trust, or association has no current or 
accumulated earnings and profits for the taxable year in which the 
distribution is actually made. The amount of the distribution is 
determined under section 301 as of the date of the distribution.

[[Page 89]]


The amount of the deduction is subject to the applicable limitations 
under sections 562 and 860(f)(2). Thus, if the entity distributes to an 
individual shareholder property (other than money) which on the date of 
the distribution has a fair market value in excess of its adjusted basis 
in the hands of the entity, the amount of the deficiency dividend in the 
individual's hands for purposes of section 316(b)(3) is determined by 
using the property's fair market value on that date. Nevertheless, the 
amount of the deficiency dividend the entity may deduct is limited, 
under Sec. 1.562-1(a), to the adjusted basis of the property and the 
amount taxable to the individual as a dividend is determined by 
reference to the current and accumulated earnings and profits for the 
year to which the determination applies.
    (ii) The qualified investment entity does not have to distribute the 
full amount of the adjustment in order to pay a deficiency dividend. For 
example, assume that in 1983 a determination with respect to a calendar 
year regulated investment company results in an increase of $100 in 
investment company taxable income (computed without the dividends paid 
deduction) for 1981 and no other change. The regulated investment 
company may choose to pay a deficiency dividend of $100 or of any lesser 
amount and be allowed a dividends paid deduction for 1981 for the amount 
of that deficiency dividend.
    (4) Status of distributor. The corporation, trust, or association 
that pays the deficiency dividend does not have to be a qualified 
investment entity at the time of payment.
    (5) Certain definitions to apply. For purposes of sections 860(d) 
(defining adjustment) and (f)(2) (limitations) the definitions of the 
terms ``investment company taxable income,'' ``real estate investment 
trust taxable income,'' and ``capital gains dividends'' in sections 
852(b)(2), 857(b)(2), 852(b)(3)(C), and 857(b)(3)(C) apply, as 
appropriate to the particular entity.
    (b) Determination and claim for deduction--(1) Determination. For 
purposes of applying section 860(e), the following rules apply:
    (i) The date of determination by a decision of the United States Tax 
Court, the date upon which a judgment of a court becomes final, and the 
date of determination by a closing agreement shall be determined under 
the rules in Sec. 1.547-2(b)(1) (ii), (iii), and (iv).
    (ii) A determination under section 860(e)(3) may be made by an 
agreement signed by the district director or another official to whom 
authority to sign the agreement is delegated, and by or on behalf of the 
taxpayer. The agreement shall set forth the amount, if any, of each 
adjustment described in subparagraphs (A), (B), and (C) of section 
860(d) (1) or (2) (as appropriate) for the taxable year and the amount 
of the liability for any tax imposed by section 11(a), 56(a), 852(b)(1), 
852(b)(3)(A), 857(b)(1), 857(b)(3)(A), or 1201(a) for the taxable year. 
The agreement shall also set forth the amount of the limitation 
(determined under section 860(f)(2)) on the amount of deficiency 
dividends that can qualify as capital gain dividends and ordinary 
dividends, respectively, for the taxable year. An agreement under this 
subdivision (ii) which is signed by the district director (or other 
delegate) shall be sent to the taxpayer at its last known address by 
either registered or certified mail. For further guidance regarding the 
definition of last known address, see Sec. 301.6212-2 of this chapter. 
If registered mail is used, the date of registration is the date of 
determination. If certified mail is used, the date of the postmark on 
the sender's receipt is the date of determination. However, if a 
dividend is paid by the taxpayer before the registration or postmark 
date, but on or after the date the agreement is signed by the district 
director (or other delegate), the date of determination is the date of 
signing.
    (2) Claim for deduction. A claim for deduction for a deficiency 
dividend shall be made, with the requisite declaration, on Form 976 and 
shall contain the following information and have the following 
attachments:
    (i) The name, address, and taxpayer identification number of the 
corporation, trust, or association;
    (ii) The amount of the deficiency and the taxable year or years 
involved;
    (iii) The amount of the unpaid deficiency or, if the deficiency has 
been

[[Page 90]]

paid in whole or in part, the date of payment and the amount thereof;
    (iv) A statement as to how the deficiency was established (i.e., by 
an agreement under section 860(e)(3), by a closing agreement under 
section 7121, or by a decision of the Tax Court or court judgment);
    (v) Any date or other information with respect to the determination 
that is required by Form 976;
    (vi) The amount and date of payment of the dividend with respect to 
which the claim for the deduction for deficiency dividends is filed;
    (vii) The amount claimed as a deduction for deficiency dividends;
    (viii) If the amount claimed as a deduction for deficiency dividends 
includes any amount designated (or to be designated) as capital gain 
dividends, the amount of capital gain dividends for which a deficiency 
dividend deduction is claimed;
    (ix) Any other information required by the claim form;
    (x) A certified copy of the resolution of the trustees, directors, 
or other authority authorizing the payment of the dividend with respect 
to which the claim is filed; and
    (xi) A copy of any court decision, judgment, agreement, or other 
document required by Form 976.
    (3) Filing claim. The claim, together with the accompanying 
documents, shall be filed with the district director, or director of the 
internal revenue service center, with whom the income tax return for the 
taxable year for which the determination applies was filed. In the event 
that the determination is an agreement with the district director (or 
other delegate) described in section 860(e)(3) and paragraph (b)(1)(ii) 
of this section, the claim may be filed with the district director with 
whom (or pursuant to whose delegation) the agreement was made.

(The reporting requirements of this section were approved by the Office 
of Management and Budget under control number 1545-0045)

(Sec. 7805, 68A Stat. 917; 26 U.S.C. 7805; sec. 860(e) (92 Stat. 2849, 
26 U.S.C. 860(e)); sec. 860(g) (92 Stat. 2850, 26 U.S.C. 860(g)))

[T.D. 7936, 49 FR 2107, Jan. 18, 1984; 49 FR 3177, Jan. 26, 1984, as 
amended by T.D. 8939, 66 FR 2819, Jan. 12, 2001]