[Code of Federal Regulations]
[Title 26, Volume 9]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.858-1]

[Page 86-88]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.858-1  Dividends paid by a real estate investment trust after 
close of taxable year.

    (a) General rule. Under section 858, a real estate investment trust 
may elect to treat certain dividends that are distributed within a 
specified period after the close of a taxable year as having been paid 
during the taxable year. The dividend is taken into account in 
determining the deduction for dividends paid for the taxable year in 
which it is treated as paid. The dividend may be an ordinary dividend 
or, subject to the requirements of sections 857(b)(3)(C) and 858(c), a 
capital gain dividend. The trust may make the dividend declaration 
required by section 858(a)(1) either before or after the close of the 
taxable year as long as the declaration is made before the time 
prescribed by law for filing its return for the taxable year (including 
the period of any extension of time granted for filing the return).
    (b) Election--(1) Method of making election. The election must be 
made in the return filed by the trust for the taxable year. The election 
shall be made by treating the dividend (or portion thereof) to which the 
election applies as a dividend paid during the taxable year of the trust 
in computing its real estate investment trust taxable income and, if 
applicable, the alternative tax imposed by section 857(b)(3)(A). (In the 
case of an election with respect to a taxable year ending before October 
5, 1976, if the dividend (or portion thereof) to which the election is 
to apply is a capital gain dividend, the trust shall treat the dividend 
as paid during such taxable year in computing the amount of capital 
gains dividends paid during the taxable year.) In the case of an 
election with respect to a taxable year beginning after October 4, 1976, 
the trust must also specify in its return (or in a statement attached to 
its return) the exact dollar amount that is to be treated as having been 
paid during the taxable year.
    (2) Limitation based on earnings and profits. The election provided 
in section 858(a) may be made only to the extent that the earnings and 
profits of the taxable year (computed with the application of sections 
857(d) and Sec. 1.857-7) exceed the total amount of distributions out 
of such earnings and profits actually made during the taxable year. For 
purposes of the preceding sentence, deficiency dividends and 
distributions with respect to which an election has been made for a 
prior year under section 858(a) are disregarded in determining the total 
amount of distributions out of earnings and profits actually made during 
the taxable year. The dividend or portion thereof, with respect to which 
the real estate investment trust has made a valid election under section 
858(a), shall be considered as paid out of the earnings and profits of 
the taxable year for which such election is made, and not out of the 
earnings and profits of the taxable year in which the distribution is 
actually made.
    (3) Additional limitation based on amount specified. The amount 
treated under section 858(a) as having been paid in a taxable year 
beginning after October 4, 1976, cannot exceed the lesser of (i) the 
dollar amount specified by the trust in its return (or a statement 
attached thereto) in making the election or (ii) the amount allowable 
under the limitation prescribed in paragraph (b)(2) of this section.
    (4) Irrevocability of the election. After the expiration of the time 
for filing the return for the taxable year for which an election is made 
under section 858(a), such election shall be irrevocable with respect to 
the dividend or portion thereof to which it applies.
    (c) Receipt by shareholders. Under section 858(b), the dividend or 
portion thereof, with respect to which a valid election has been made, 
will be includable in the gross income of the shareholders of the real 
estate investment trust for the taxable year in which the dividend is 
received by them.

[[Page 87]]

    (d) Illustrations. The application of paragraphs (a), (b), and (c) 
of this section may be illustrated by the following examples:

    Example 1. The X Trust, a real estate investment trust, had taxable 
income (and earnings and profits) for the calendar year 1961 of 
$100,000. During that year the trust distributed to shareholders taxable 
dividends aggregating $88,000. On March 10, 1962, the trust declared a 
dividend of $37,000 payable to shareholders on March 20, 1962. Such 
dividend consisted of the first regular quarterly dividend for 1962 of 
$25,000 plus an additional $12,000 representing that part of the taxable 
income for 1961 which was not distributed in 1961. On March 15, 1962, 
the X Trust filed its Federal income tax return and elected therein to 
treat $12,000 of the total dividend of $37,000 to be paid to 
shareholders on March 20, 1962, as having been paid during the taxable 
year 1961. Assuming that the X Trust actually distributed the entire 
amount of the dividend of $37,000 on March 20, 1962, an amount equal to 
$12,000 thereof will be treated for the purposes of section 857(a) as 
having been paid during the taxable year 1961. Upon distribution of such 
dividend the trust becomes a qualified real estate investment trust for 
the taxable year 1961. Such amount ($12,000) will be considered by the X 
Trust as a distribution out of the earnings and profits for the taxable 
year 1961, and will be treated by the shareholders as a taxable dividend 
for the taxable year in which such distribution is received by them. 
However, assuming that the X Trust is not a qualified real estate 
investment trust for the calendar year 1962, nevertheless, the $12,000 
portion of the dividend (paid on March 20, 1962) which the trust elected 
to relate to the calendar year 1961, will not qualify as a dividend for 
purposes of section 34, 116, or 243.
    Example 2. The Y Trust, a real estate investment trust, had taxable 
income (and earnings and profits) for the calendar year 1964 of 
$100,000, and for 1965 taxable income (and earnings and profits) of 
$125,000. On January 1, 1964, the trust had a deficit in its earnings 
and profits accumulated since February 28, 1913, of $115,000. During the 
year 1964 the trust distributed to shareholders taxable dividends 
aggregating $85,000. On March 5, 1965, the trust declared a dividend of 
$65,000 payable to shareholders on March 31, 1965. On March 15, 1965, 
the Y Trust filed its Federal income tax return in which it included 
$40,000 of the total dividend of $65,000 payable to shareholders on 
March 31, 1965, as a dividend paid by it during the taxable year 1964. 
On March 31, 1965, the Y Trust distributed the entire amount of the 
dividend of $65,000 declared on March 5, 1965. The election under 
section 858(a) is valid only to the extent of $15,000, the amount of the 
undistributed earnings and profits for 1964 ($100,000 earnings and 
profits less $85,000 distributed during 1964). The remainder ($50,000) 
of the $65,000 dividend paid on March 31, 1965, could not be the subject 
of an election, and such amount will be regarded as a distribution by 
the Y Trust out of earnings and profits for the taxable year 1965. 
Assuming that the only other distribution by the Y Trust during 1965 was 
a distribution of $75,000 paid as a dividend on October 31, 1965, the 
total amount of the distribution of $65,000 paid on March 31, 1965, is 
to be treated by the shareholders as taxable dividends for the taxable 
year in which such dividend is received. The Y Trust will treat the 
amount of $15,000 as a distribution of the earnings or profits of the 
trust for the taxable year 1964, and the remaining $50,000 as a 
distribution of the earnings or profits for the year 1965. The 
distribution of $75,000 on October 31, 1966, is, of course, a taxable 
dividend out of the earnings and profits for the year 1965.
    Example 3. Assume the facts are the same as in example 2, except 
that the taxable years involved are calendar years 1977 and 1978, and Y 
Trust specified in its Federal income tax return for 1977 that the 
dollar amount of $40,000 of the $65,000 distribution payable to 
shareholders on March 31, 1978, is to be treated as having been paid in 
1977. The result will be the same as in example 2, since the amount of 
the undistributed earnings and profits for 1977 is less than the $40,000 
amount specified by Y Trust in making its election. Accordingly, the 
election is valid only to the extent of $15,000. Y Trust will treat the 
amount of $15,000 as a distribution, in 1977, of earnings and profits of 
the trust for the taxable year 1977 and the remaining $50,000 as a 
distribution, in 1978, of the earnings and profits for 1978.

    (e) Notice to shareholders. Section 858(c) provides that, in the 
case of dividends with respect to which a real estate investment trust 
has made an election under section 858(a), any notice to shareholders 
required under part II, subchapter M, chapter 1 of the Code, with 
respect to such amounts, shall be made not later than 30 days after the 
close of the taxable year in which the distribution is made. Thus, the 
notice requirement of section 857(b)(3)(C) and paragraph (f) of Sec. 
1.857-6 with respect to capital gains dividends may be satisfied with 
respect to amounts to which section 858(a) and this section apply if the 
notice relating to such amounts is mailed to the shareholders not later 
than 30 days after the close of the taxable year in which the 
distribution is made. If the notice

[[Page 88]]

under section 858(c) reltes to an election with respect to any capital 
gains dividends, such capital gains dividends shall be aggregated by the 
real estate investment trust with the designated capital gains dividends 
actually paid during the taxable year to which the election applies (not 
including deficiency dividends or dividends with respect to which an 
election has been made for a prior taxable year under section 858) to 
determine whether the aggregate of the designated capital gains 
dividends with respect to such taxable year exceeds the net capital gain 
of the trust. See section 857(b)(3)(C) and paragraph (f) of Sec. 1.857-
6.

(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. 6598, 27 FR 4089, Apr. 28, 1962, as amended by T.D. 7767, 46 FR 
11279, Feb. 6, 1981]