860(f)(2)(B), may be a capital gain dividend. (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] $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. The amount of the deduction is subject to the applicable limitations under sec tions 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 §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 F 11 court becomes final, and the date of determination by a closing agreement shall be determined under the rules in §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. 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 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] §1.860-3 Interest and additions to tax. (a) In general. If a qualified investment entity is allowed a deduction for deficiency dividends with respect to a taxable year, under section 860(c)(1) the tax imposed on the entity by chapter 1 of the Code (computed by taking into account the deduction) for that year is deemed to be increased by the amount of the deduction. This deemed increase in tax, however, applies solely for purposes of determining the liability of the entity for interest under subchapter A of chapter 67 of the Code and for additions to tax and additional amounts under chapter 68 of the Code. For purposes of applying subchapter A of chapter 67 and 68, the last date prescribed for payment of the deemed increase in tax is considered to be the last date prescribed for the payment of tax (determined in the manner provided in section 6601(b)) for the taxable year for which the deduction for deficiency dividends is allowed. The deemed increase in tax is considered to be paid as of the date that the claim for the deficiency dividend deduction described in section 860(g) is filed. (b) Overpayments of tax. If a qualified investment entity is entitled to a credit or refund of an overpayment of the tax imposed by chapter 1 of the Code for the taxable year for which the deficiency dividend deduction is allowed, then, for purposes of computing interest, additions to tax, and additional amounts, the payment (or payments) that result in the overpayment and that precede the filing of the claim described in section 860(g) will be applied against and reduce the increase in tax that is deemed to occur under section 860(c)(1). (c) Examples. This section is illustrated by the following examples: Example 1. Corporation X is a real estate investment trust that files its income tax return on a calendar year basis. X receives an extension of time until June 15, 1978, to file its 1977 income tax return and files the return on May 15, 1978. X does not elect to pay any tax due in installments. For 1977, X reports real estate investment trust taxable income (computed without the dividends paid deduction) of $100, a dividends paid deduction of $100, and no tax liability. Following an examination of X's 1977 return, the district director and X enter into an agreement which is a determination under section 860(e)(3). The determination is dated November 1, 1979, and increases X's real estate investment trust taxable income (computed without the dividends paid deduction) by $20 to $120. Thus, taking into account the $100 of dividends paid in 1977, X has undistributed real estate investment trust taxable income of $20 as a result of the determination. X pays a dividend of $20 on November 10, 1979, files a claim for a deficiency dividend deduction of this $20 pursuant to section 860(g) on November 15, 1979, and is allowed a deficiency dividend deduction of $20 for 1977. After taking into account this deduction, X has no real estate investment trust taxable income and meets the distribution requirements of section 857(a)(1). However, for purposes of section 6601 (relating to interest on underpayment of tax), the tax imposed by chapter 1 of the Code on X for 1977 is deemed increased by this $20, and the last date prescribed for payment of the tax is March 15, 1978 (the due date of the 1977 return determined without any extension of time). The tax of $20 is deemed paid on November 15, 1979, the date the claim for the deficiency dividend deduction is filed. Thus, X is liable for interest on $20, at the rate established under section 6621, for the period from March 15, 1978, to November 15, 1979. Also, for purposes of determining whether X is liable for any addition to tax or additional amount imposed by chapter 68 of the Code (including the penalty prescribed by section 6697), the amount of tax imposed on X by chapter 1 of the Code is deemed to be increased by $20 (the amount of the deficiency dividend deduction allowed), the last date prescribed for payment of such tax is March 15, 1978, and the tax of $20 is deemed to be paid on November 15, 1979. X, however, is not subject to interest and penalties for the amount of any tax for which it would have been liable under section 11(a), 56(a), 1201(a), or 857(b) had it not been allowed the $20 deduction for deficiency dividends. Example 2. Assume the facts are the same as in example (1) except that the district director, upon examining X's income tax return, asserts an income tax deficiency of $4, based on an asserted increase of $10 in real estate investment trust taxable income, and no agreement is entered into between the parties. X pays the $4 on June 1, 1979, and files suit for refund in the United States District Court. The District Court, in a decision which becomes final on November 1, 1980, holds that X did fail to report $10 of real estate investment trust taxable income and is not entitled to any refund. (No other item of income or deduction is in issue.) X pays a dividend of $10 on November 10, 1980, files a claim for a deficiency dividend deduction of this $10 on November 15, 1980, and is allowed a deficiency dividend deduction of $10 for 1977. Assume further that $4 is refunded to X on December 31, 1980, as the result of the $10 deficiency dividend deduction being allowed. Also assume that any assessable penalties. additional amounts, and additions to tax (including the penalty imposed by section 6697) for which X is liable are paid within 10 days of notice and demand, so that no interest is 婆 imposed on such penalties, etc. X's liability for interest for the period March 15, 1978, to June 1, 1979, is determined with respect to $10 (the amount of the deficiency dividend deduction allowed). X's liability for interest for the period June 1, 1979, to November 15, 1980, is determined with respect to $6, i.e., $10 minus the $4 payment. X is entitled to interest on the $4 overpayment for the period described in section 6611(b)(2), beginning on November 15, 1980. (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 2108, Jan. 18, 1984] §1.860-4 Claim for credit or refund. If the allowance of a deduction for a deficiency dividend results in an overpayment of tax, the taxpayer, in order to secure credit or refund of the overpayment, must file a claim on Form 1120X in addition to the claim for the deficiency dividend deduction required under section 860(g). The credit or refund will be allowed as if on the date of the determination (as defined in section 860(e)) two years remained before the expiration of the period of limitations on the filing of claim for refund for the taxable year to which the overpayment relates. (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 2109, Jan. 18, 1984] §1.860-5 Effective date. (a) In general. Section 860 and §§1.8601 through 1.860-4 apply with respect to determinations after November 6, 1978. (b) Prior determination of real estate investments trusts. Section 859 (as in effect before the enactment of the Revenue Act of 1978) applies to determinations with respect to real estate investment trusts occurring after October 4, 1976, and before November 7, 1978. In the case of such a determination, the rules in §§1.860-1 through 1.860-4 apply, a reference in this chapter 1 to section 860 (or to a particular provision of section 860) shall be considered to be a reference to section 859 (or to the corresponding substantive provision of section 859), as in effect before enact ment of the Revenue Act of 1978, and "qualified investment entity" in §§1.381(c)25-1(a) and 1.860-1 through 1.860-3 means a real estate investment trust. (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 2109, Jan. 18, 1984] §1.860A-0 Outline of REMIC provisions. This section lists the paragraphs contained in §§ 1.860A-1 through 1.860G-3. Section 1.860 A-1 Effective dates and transition rules. (a) In general. (1) Reporting regulations. (i) Transfers of certain residual interests. (ii) Transfers to foreign holders. (iii) Residual interests that lack significant value. (3) Excise taxes. (4) Rate based on current interest rate. (i) In general. (ii) Rate based on index. (iii) Transition obligations. Section 1.860C-1 Taxation of holders of (a) Pass-thru of income or loss. (b) Adjustments to basis of residual interests. (1) Increase in basis. (2) Decrease in basis. (3) Adjustments made before disposition. (c) Counting conventions. Section 1.860C-2 Determination of REMIC taxable income or net loss. (a) Treatment of gain or loss. (2) Deduction allowable under section 163. (3) Deduction allowable under section 166. (4) Deduction allowable under section 212. (5) Expenses and interest relating to taxexempt income. Section 1.860D-1 Definition of a REMIC. (a) In general. (b) Specific requirements. (1) Interests in a REMIC. (i) In general. (ii) De minimis interests. (2) Certain rights not treated as interests. (i) Payments for services. (ii) Stripped interests. (iii) Reimbursement rights under credit enhancement contracts. (iv) Rights to acquire mortgages. (3) Asset test. (i) In general. (ii) Safe harbor. (4) Arrangements test. (5) Reasonable arrangements. (i) Arrangements to prevent disqualified organizations from holding residual inter ests. (ii) Arrangements to ensure that information will be provided. (6) Calendar year requirement. (c) Segregated pool of assets. (1) Formation of REMIC. (2) Identification of assets. (3) Qualified entity defined. (d) Election to be treated as a real estate mortgage investment conduit. (1) In general. (2) Information required to be reported in the REMIC's first taxable year. (3) Requirement to keep sufficient records. Section 1.860E-1 Treatment of taxable income of a residual interest holder in excess of daily accruals. (a) Excess inclusion cannot be offset by otherwise allowable deductions. (1) In general. (2) Affiliated groups. (3) Special rule for certain financial institutions. (i) In general. (ii) Ordering rule. (A) In general. (B) Example. (iii) Significant value. (iv) Determining anticipated weighted average life. (A) Anticipated weighted average life of the REMIC. (B) Regular interests that have a specified principal amount. (C) Regular interests that have no specified principal amount or that have only a nominal principal amount, and all residual interests. (D) Anticipated payments. (b) Treatment of a residual interest held by REITS, RICs, common trust funds, and subchapter T cooperatives. [Reserved] (c) Transfers of noneconomic residual interests. (1) In general. (2) Noneconomic residual interest. (3) Computations. (4) Safe harbor for establishing lack of improper knowledge. (d) Transfers to foreign persons. Section 1.860E-2 Tax on transfers of residual interest to certain organizations. (a) Transfers to disqualified organizations. (1) Payment of tax. (2) Transitory ownership. (3) Anticipated excess inclusions. (4) Present value computation. (5) Obligation of REMIC to furnish information. (6) Agent. (7) Relief from liability. (i) Transferee furnishes information under penalties of perjury. (ii) Amount required to be paid. (2) Record holder furnishes information under penalties of perjury. (3) Deductibility of tax. (4) Allocation of tax. Section 1.860 F-1 Qualified liquidations. Section 1.860F-2 Transfers to a REMIC. (a) Formation of a REMIC. (1) In general. (2) Tiered arrangements. (i) Two or more REMICS formed pursuant to a single set of organizational documents. (ii) A REMIC and one or more investment trusts formed pursuant to a single set of documents. (b) Treatment of sponsor. (1) Sponsor defined. (2) Nonrecognition of gain or loss. (3) Basis of contributed assets allocated among interests. (4) Treatment of unrecognized gain or loss. (i) Unrecognized gain on regular interests. (ii) Unrecognized loss on regular interests. (iii) Unrecognized gain on residual interests. (iv) Unrecognized loss on residual interests. (5) Additions to or reductions of the sponsor's basis. (6) Transferred basis property. (c) REMIC's basis in contributed assets. Section 1.860 F-4 REMIC reporting requirements and other administrative rules. (a) In general. (b) REMIC tax return. (1) In general. (2) Income tax return. (c) Signing of REMIC return. (1) In general. (2) REMIC whose startup day is before November 10, 1988. (i) In general. (ii) Startup day. (iii) Exception. (d) Designation of tax matters person. (e) Notice to holders of residual interests. (1) Information required. (i) In general. (ii) Information with respect to REMIC as sets. |