[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: 26CFR1.855-1]

[Page 47-49]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.855-1  Dividends paid by regulated investment company after 
close of taxable year.

    (a) General rule. In--
    (1) Determining under section 852(a) and paragraph (a) of Sec. 
1.852-1 whether the deduction for dividends paid during the taxable year 
(without regard to capital gain dividends) by a regulated investment 
company equals or exceeds 90 percent of its investment company taxable 
income (determined without regard to the provisions of section 
852(b)(2)(D)),
    (2) Computing its investment company taxable income (under section 
852(b)(2) and Sec. 1.852-3), and
    (3) Determining the amount of capital gain dividends (as defined in 
section 852(b)(3) and paragraph (c) of Sec. 1.852-4 paid during the 
taxable year, any dividend (or portion thereof) declared by the 
investment company either before or after the close of the taxable year 
but in any event before the time prescribed by law for the filing of its 
return for the taxable year (including the period of any extension of 
time granted for filing such return) shall, to the extent the company so 
elects in such return, be treated as having been paid during such 
taxable year. This rule is applicable only if the entire amount of such 
dividend is actually distributed to the 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.
    (b) Election--(1) Method of making election. The election must be 
made in the return filed by the company for the taxable year. The 
election shall be made by the taxpayer (the regulated investment 
company) by treating the dividend (or portion thereof) to which such 
election applies as a dividend paid during the taxable year in computing 
its investment company taxable income, or if the dividend (or portion 
thereof) to which such election applies is to be designated by the 
company as a capital gain dividend, in computing the amount of capital 
gain dividends paid during such taxable year. The election provided in 
section 855(a) may be made only to the extent that the earnings and 
profits of the taxable year (computed with the application of section 
852(c) and Sec. 1.852-5) exceed the total amount of distributions out 
of such earnings and profits actually made during the taxable year (not 
including distributions with respect to which an election has been made 
for a prior year under section 855(a)). The dividend or portion thereof, 
with respect to which the regulated investment company has made a valid 
election under section 855(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.
    (2) 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

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855(a), such election shall be irrevocable with respect to the dividend 
or portion thereof to which it applies.
    (c) Receipt by shareholders. Under section 855(b), the dividend or 
portion thereof, with respect to which a valid election has been made, 
will be includible in the gross income of the shareholders of the 
regulated investment company for the taxable year in which the dividend 
is received by them.
    (d) Examples. The application of paragraphs (a), (b), and (c) of 
this section may be illustrated by the following examples:

    Example 1. The X Company, a regulated investment company, had 
taxable income (and earnings or profits) for the calendar year 1954 of 
$100,000. During that year the company distributed to shareholders 
taxable dividends aggregating $88,000. On March 10, 1955, the company 
declared a dividend of $37,000 payable to shareholders on March 20, 
1955. Such dividend consisted of the first regular quarterly dividend 
for 1955 of $25,000 plus an additional $12,000 representing that part of 
the taxable income for 1954 which was not distributed in 1954. On March 
15, 1955, the X Company 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, 1955, as having been paid during the taxable 
year 1954. Assuming that the X Company actually distributed the entire 
amount of the dividend of $37,000 on March 20, 1955, an amount equal to 
$12,000 thereof will be treated for the purposes of section 852(a) as 
having been paid during the taxable year 1954. Such amount ($12,000) 
will be considered by the X Company as a distribution out of the 
earnings and profits for the taxable year 1954, and will be treated by 
the shareholders as a taxable dividend for the taxable year in which 
such distribution is received by them.
    Example 2. The Y Company, a regulated investment company, had 
taxable income (and earnings or profits) for the calendar year 1954 of 
$100,000, and for 1955 taxable income (and earnings or profits) of 
$125,000. On January 1, 1954, the company had a deficit in its earnings 
and profits accumulated since February 28, 1913, of $115,000. During the 
year 1954 the company distributed to shareholders taxable dividends 
aggregating $85,000. On March 5, 1955, the company declared a dividend 
of $65,000 payable to shareholders on March 31, 1955. On March 15, 1955, 
the Y Company 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, 1955, as a dividend paid by it during the taxable year 1954. 
On March 31, 1955, the Y Company distributed the entire amount of the 
dividend of $65,000 declared on March 5, 1955. The election under 
section 855(a) is valid only to the extent of $15,000, the amount of the 
undistributed earnings and profits for 1954 ($100,000 earnings and 
profits less $85,000 distributed during 1954). The remainder ($50,000) 
of the $65,000 dividend paid on March 31, 1955, could not be the subject 
of an election, and such amount will be regarded as a distribution by 
the Y Company out of earnings and profits for the taxable year 1955. 
Assuming that the only other distribution by the Y Company during 1955 
was a distribution of $75,000 paid as a dividend on October 31, 1955, 
the total amount of the distribution of $65,000 paid on March 31, 1955, 
is to be treated by the shareholders as taxable dividends for the 
taxable year in which such dividend is received. The Y Company will 
treat the amount of $15,000 as a distribution of the earnings or profits 
of the company for the taxable year 1954, and the remaining $50,000 as a 
distribution of the earnings or profits for the year 1955. The 
distribution of $75,000 on October 31, 1955, is, of course, a taxable 
dividend out of the earnings and profits for the year 1955.

    (e) Notice to shareholders. Section 855(c) provides that in the case 
of dividends, with respect to which a regulated investment company has 
made an election under section 855(a), any notice to shareholders 
required under subchapter M, chapter 1 of the Code, with respect to such 
amounts, shall be made not later than 45 days (30 days for a taxable 
year ending before February 26, 1964) after the close of the taxable 
year in which the distribution is made. Thus, the notice requirements of 
section 852(b)(3)(C) and paragraph (c) of Sec. 1.852-4 with respect to 
capital gain dividends, section 853(c) and Sec. 1.853-3 with respect to 
allowance to shareholder of foreign tax credit, and section 854(b)(2) 
and Sec. 1.854-2 with respect to the amount of a distribution which may 
be treated as a dividend, may be satisfied with respect to amounts to 
which section 855(a) and this section apply if the notice relating to 
such amounts is mailed to the shareholders not later than 45 days (30 
days for a taxable year ending before February 26, 1964) after the close 
of the taxable year in which the distribution is made. If the notice 
under section 855(c) relates to an election with respect to any capital 
gain dividends, such capital gain dividends shall be aggregated by the 
investment company with the designated capital gain dividends actually 
paid during the taxable year to which the

[[Page 49]]

election applies (not including such dividends with respect to which an 
election has been made for a prior year under section 855) for the 
purpose of determining whether the aggregate of the designated capital 
gain dividends with respect to such taxable year of the company is 
greater than the excess of the net long-term capital gain over the net 
short-term capital loss of the company. See section 852(b)(3)(C) and 
paragraph (c) of Sec. 1.852-4.
    (f) Foreign tax election. Section 855(d) provides that in the case 
of an election made under section 853 (relating to foreign taxes), the 
shareholder of the investment company shall consider the foreign income 
received, and the foreign tax paid, as received and paid, respectively, 
in the shareholder's taxable year in which distribution is made.

[T.D. 6500, 25 FR 11910, Nov. 26, 1960, as amended by T.D. 6921, 32 FR 
8757, June 20, 1967]

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