[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: 26CFR1.857-6]

[Page 80-82]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.857-6  Method of taxation of shareholders of real estate 
investment trusts.

    (a) Ordinary income. Except as otherwise provided in paragraph (b) 
of this section (relating to capital gains), a shareholder receiving 
dividends from a real estate investment trust shall include such 
dividends in gross income for the taxable year in which they are 
received. See section 858(b) and paragraph (c) of Sec. 1.858-1 for 
treatment by shareholders of dividends paid by a real estate investment 
trust after the close of its taxable year in the case of an election 
under section 858(a).
    (b) Capital gains. Under section 857(b)(3)(B), shareholders of a 
real estate investment trust who receive capital gain dividends (as 
defined in paragraph (e) of this section), in respect of the capital 
gains of a corporation, trust, or association for a taxable year for 
which it is taxable under part II of subchapter M as a real estate 
investment trust, shall treat such capital gain dividends as gains from 
the sale or exchange of capital assets held for more than 1 year (6 
months for taxable years beginning before 1977; 9 months for taxable 
years beginning in 1977) and realized in the taxable year of the 
shareholder in which the dividend was received. In the case of dividends 
with respect to any taxable year of a real estate investment trust 
ending after December 31, 1969, and beginning before January 1, 1975, 
the portion of a shareholder's capital gain dividend which in his hands 
is gain to which section 1201(d) (1) or (2) applies is the portion so 
designated by the real estate investment trust pursuant to paragraph 
(e)(2) of this section.
    (c) Special treatment of loss on the sale or exchange of real estate 
investment trust stock held less than 31 days--(1) In general. Under 
section 857(b)(7), if any person with respect to a share of real estate 
investment trust stock held for a period of less than 31 days, is 
required by section 857(b)(3)(B) to include in gross income as a gain 
from the sale or exchange of a capital asset held for more than 1 year 
(6 months for taxable years beginning before 1977; 9 months for taxable 
years beginning in 1977) the amount of a capital gains dividend, then 
such person shall, to the extent of such amount, treat any loss on the 
sale or exchange of such share as a loss from the sale or exchange of a 
capital asset held for more than 1 year (6 months for taxable years 
beginning before 1977; 9 months for taxable years beginning in 1977).
    (2) Determination of holding period. The rules contained in section 
246(c)(3) (relating to the determination of holding periods for purposes 
of the deduction for dividends received) shall be applied in determining 
whether, for purposes of section 857(b)(7)(B) and this paragraph, a 
share of real estate investment trust stock has been held for a period 
of less than 31 days. In applying those rules, however, ``30 days'' 
shall be substituted for the number of days specified in subparagraph 
(B) of such section.
    (3) Illustration. The application of section 857(b)(7) and this 
paragraph may be illustrated by the following example:

    Example. On December 15, 1961, A purchased a share of stock in the S 
Real Estate Investment Trust for $20. The S trust declared a capital 
gains dividend of $2 per share to shareholders of record on December 31, 
1961. A, therefore, received a capital gain dividend of $2 which, 
pursuant to section 857(b)(3)(B), he must treat as a gain from the sale 
or exchange of a capital asset held for more than six months. On January 
5, 1962, A sold his share of stock in the S trust for $17.50, which sale 
resulted in a loss of $2.50. Under section 857(b)(4) and this paragraph, 
A must treat $2 of such loss (an amount equal to the capital gain 
dividend received with respect to such share of stock) as a loss from 
the sale or exchange of a capital asset held for more than six months.


[[Page 81]]


    (d) Dividend received credit, exclusion, and deduction not allowed. 
Any dividend received from a real estate investment trust which, for the 
taxable year to which the dividend relates, is a qualified real estate 
investment trust, shall not be eligible for the dividend received credit 
(for dividends received on or before December 31, 1964) under section 
34(a), the dividend received exclusion under section 116, or the 
dividend received deduction under section 243.
    (e) Definition of capital gain dividend. (1)(i) A capital gain 
dividend, as defined in section 857(b)(3)(C), is any dividend or part 
thereof which is designated by a real estate investment trust as a 
capital gain dividend in a written notice mailed to its shareholders 
within the period specified in section 857(b)(3)(C) and paragraph (f) of 
this section. If the aggregate amount so designated with respect to the 
taxable year (including capital gain dividends paid after the close of 
the taxable year pursuant to an election under section 858) is greater 
than the net capital gain 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 short-term capital loss bears to the 
aggregate of the amount so designated. For example, a real estate 
investment trust making its return on the calendar year basis advised 
its shareholders by written notice mailed December 30, 1961, that 
$200,000 of a distribution of $500,000 made December 15, 1961, 
constituted a capital gain dividend, amounting to $2 per share. It was 
later discovered that an error had been made in determining the net 
capital gain of the taxable year and the net capital gain was $100,000 
instead of $200,000. In such case, each shareholder would have received 
a capital gain dividend of $1 per share instead of $2 per share.
    (ii) For purposes of section 857(b)(3)(C) and this paragraph, the 
net capital gain for a taxable year ending after October 4, 1976, is 
deemed not to exceed the real estate investment trust taxable income 
determined by taking into account the net operating loss deduction for 
the taxable year but not the deduction for dividends paid. See example 2 
in Sec. 1.172-5(a)(4).
    (2) In the case of capital gain dividends designated with respect to 
any taxable year of a real estate investment trust ending after December 
31, 1969, and beginning before January 1, 1975 (including capital gain 
dividends paid after the close of the taxable year pursuant to an 
election under section 858), the real estate investment trust must 
include in its written notice designating the capital gain dividend a 
statement showing the shareholder's proportionate share of such dividend 
which is gain described in section 1201(d)(1) and his proportionate 
share of such dividend which is gain described in section 1201(d)(2). In 
determining the portion of the capital gain dividend which, in the hands 
of a shareholder, is gain described in section 1201(d) (1) or (2), the 
real estate investment trust shall consider that capital gain dividends 
for a taxable year are first made from its long-term capital gains which 
are not described in section 1201(d) (1) or (2), to the extent thereof, 
and then from its long-term capital gains for such year which are 
described in section 1201(d) (1) or (2). A shareholder's proportionate 
share of gains which are described in section 1201(d)(1) is the amount 
which bears the same ratio to the amount paid to him as a capital gain 
dividend in respect of such year as (i) the aggregate amount of the 
trust's gains which are described in section 1201(d)(1) and paid to all 
shareholders bears to (ii) the aggregate amount of the capital gain 
dividend paid to all shareholders in respect of such year. A 
shareholder's proportionate share of gains which are described in 
section 1201(d)(2) shall be determined in a similar manner. Every real 
estate investment trust shall keep a record of the proportion of each 
capital gain divided (to which this subparagraph applies) which is gain 
described in section 1201(d) (1) or (2).
    (f) Mailing of written notice to shareholders--(1) General rule. 
Except as provided in paragraph (f)(2) of this section, the written 
notice designating a dividend or part thereof as a capital gain dividend 
must be mailed to the shareholders not later than 30 days after the

[[Page 82]]

close of the taxable year of the real estate investment trust.
    (2) Net capital gain resulting from a determination. If, as a result 
of a determination (as defined in section 860(e)), occurring after 
October 4, 1976, there is an increase in the amount by which the net 
capital gain exceeds the deduction for dividends paid (determined with 
reference to capital gains dividends only) for the taxable year, then a 
real estate investment trust may designate a dividend (or part thereof) 
as a capital gain dividend in a written notice mailed to its 
shareholders at any time during the 120-day period immediately following 
the date of the determination. The designation may be made with respect 
to a dividend (or part thereof) paid during the taxable year to which 
the determination applies (including a dividend considered as paid 
during the taxable year pursuant to section 858). A deficiency dividend 
(as defined in section 860(f)), or a part thereof, that is paid with 
respect to the taxable year also may be designated as a capital gain 
dividend by the real estate investment trust (or by the acquiring 
corporation to which section 381(c)(25) applies) before the expiration 
of the 120-day period immediately following the determination. However, 
the aggregate amount of the dividends (or parts thereof) that may be 
designated as capital gain dividends after the date of the determination 
shall not exceed the amount of the increase in the excess of the net 
capital gain over the deduction for dividends paid (determined with 
reference to capital gains dividends only) that results from the 
determination. The date of a determination shall be established in 
accordance with Sec. 1.860-2(b)(1).

(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); 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. 6598, 27 FR 4088, Apr. 28, 1962, as amended by T.D. 6777, 29 FR 
17809, Dec. 16, 1964; T.D. 7337, 39 FR 44974, Dec. 30, 1974; T.D. 7728, 
45 FR 72650, Nov. 3, 1980. Redesignated and amended by T.D. 7767, 46 FR 
11277, 11279, and 11283, Feb. 6, 1981; T.D. 7936, 49 FR 2107, Jan. 18, 
1984; T.D. 8107, 51 FR 43347, Dec. 2, 1986]