26 U.S.C. § 857 (2024) — Title 26: INTERNAL REVENUE CODE / Chapter 1 / Subchapter M / Section 857: Taxation of real estate investment trusts and their beneficiaries
Taxation of real estate investment trusts and their beneficiaries
Status: in_force

(a) Requirements applicable to real estate investment trusts

The provisions of this part (other than subsection (d) of this section and subsection (g) of section 856) shall not apply to a real estate investment trust for a taxable year unless—

(1) the deduction for dividends paid during the taxable year (as defined in section 561, but determined without regard to capital gains dividends) equals or exceeds—

(A) the sum of—

(i) 90 percent of the real estate investment trust taxable income for the taxable year (determined without regard to the deduction for dividends paid (as defined in section 561) and by excluding any net capital gain); and

(ii) 90 percent of the excess of the net income from foreclosure property over the tax imposed on such income by subsection (b)(4)(A); minus

(B) any excess noncash income (as determined under subsection (e)); and

(2) either—

(A) the provisions of this part apply to the real estate investment trust for all taxable years beginning after February 28, 1986, or

(B) as of the close of the taxable year, the real estate investment trust has no earnings and profits accumulated in any non-REIT year.

For purposes of the preceding sentence, the term "non-REIT year" means any taxable year to which the provisions of this part did not apply with respect to the entity. The Secretary may waive the requirements of paragraph (1) for any taxable year if the real estate investment trust establishes to the satisfaction of the Secretary that it was unable to meet such requirements by reason of distributions previously made to meet the requirements of section 4981.

(b) Method of taxation of real estate investment trusts and holders of shares or certificates of beneficial interest

(1) Imposition of tax on real estate investment trusts

There is hereby imposed for each taxable year on the real estate investment trust taxable income of every real estate investment trust a tax computed as provided in section 11, as though the real estate investment trust taxable income were the taxable income referred to in section 11.

(2) Real estate investment trust taxable income

For purposes of this part, the term "real estate investment trust taxable income" means the taxable income of the real estate investment trust, adjusted as follows:

(A) The deductions for corporations provided in part VIII (except section 248) of subchapter B (section 241 and following, relating to the deduction for dividends received, etc.) shall not be allowed.

(B) The deduction for dividends paid (as defined in section 561) shall be allowed, but shall be computed without regard to that portion of such deduction which is attributable to the amount excluded under subparagraph (D).

(C) The taxable income shall be computed without regard to section 443(b) (relating to computation of tax on change of annual accounting period).

(D) There shall be excluded an amount equal to the net income from foreclosure property.

(E) There shall be deducted an amount equal to the tax imposed by paragraphs (5) and (7) of this subsection, section 856(c)(7)(C), and section 856(g)(5) for the taxable year.

(F) There shall be excluded an amount equal to any net income derived from prohibited transactions.

(3) Capital gains

(A) Treatment of capital gain dividends by shareholders

A capital gain dividend shall be treated by the shareholders or holders of beneficial interests as a gain from the sale or exchange of a capital asset held for more than 1 year.

(B) Definition of capital gain dividend

For purposes of this part, a capital gain dividend is any dividend, or part thereof, which is designated by the real estate investment trust as a capital gain dividend in a written notice mailed to its shareholders or holders of beneficial interests at any time before the expiration of 30 days after the close of its taxable year (or mailed to its shareholders or holders of beneficial interests with its annual report for the taxable year); except that, if there is an increase in the excess described in subparagraph (A)(ii) of this paragraph for such year which results from a determination (as defined in section 860(e)), such designation may be made with respect to such increase at any time before the expiration of 120 days after the date of such determination. If the aggregate amount so designated with respect to a taxable year of the trust (including capital gain dividends paid after the close of the taxable year described in 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 net capital gain bears to the aggregate amount so designated. For purposes of this subparagraph, the amount of the net capital gain for any taxable year which is not a calendar year shall be determined without regard to any net capital loss attributable to transactions after December 31 of such year, and any such net capital loss shall be treated as arising on the 1st day of the next taxable year. To the extent provided in regulations, the preceding sentence shall apply also for purposes of computing the taxable income of the real estate investment trust.

(C) Treatment by shareholders of undistributed capital gains

(i) Every shareholder of a real estate investment trust at the close of the trust's taxable year shall include, in computing his long-term capital gains in his return for his taxable year in which the last day of the trust's taxable year falls, such amount as the trust shall designate in respect of such shares in a written notice mailed to its shareholders at any time prior to the expiration of 60 days after the close of its taxable year (or mailed to its shareholders or holders of beneficial interests with its annual report for the taxable year), but the amount so includible by any shareholder shall not exceed that part of the amount subjected to tax in paragraph (1) which he would have received if all of such amount had been distributed as capital gain dividends by the trust to the holders of such shares at the close of its taxable year.

(ii) For purposes of this title, every such shareholder shall be deemed to have paid, for his taxable year under clause (i), the tax imposed by paragraph (1) on undistributed capital gain on the amounts required by this subparagraph to be included in respect of such shares in computing his long-term capital gains for that year; and such shareholders shall be allowed credit or refund as the case may be, for the tax so deemed to have been paid by him.

(iii) The adjusted basis of such shares in the hands of the holder shall be increased with respect to the amounts required by this subparagraph to be included in computing his long-term capital gains, by the difference between the amount of such includible gains and the tax deemed paid by such shareholder in respect of such shares under clause (ii).

(iv) In the event of such designation, the tax imposed by paragraph (1) on undistributed capital gain shall be paid by the real estate investment trust within 30 days after the close of its taxable year.

(v) The earnings and profits of such real estate investment trust, and the earnings and profits of any such shareholder which is a corporation, shall be appropriately adjusted in accordance with regulations prescribed by the Secretary.

(vi) As used in this subparagraph, the terms "shares" and "shareholders" shall include beneficial interests and holders of beneficial interests, respectively.

(D) Coordination with net operating loss provisions

For purposes of section 172, if a real estate investment trust pays capital gain dividends during any taxable year, the amount of the net capital gain for such taxable year (to the extent such gain does not exceed the amount of such capital gain dividends) shall be excluded in determining—

(i) the net operating loss for the taxable year, and

(ii) the amount of the net operating loss of any prior taxable year which may be carried through such taxable year under section 172(b)(2) to a succeeding taxable year.

(E) Certain distributions

In the case of a shareholder of a real estate investment trust to whom section 897 does not apply by reason of the second sentence of section 897(h)(1) or subparagraph (A)(ii) or (C) of section 897(k)(2), the amount which would be included in computing long-term capital gains for such shareholder under subparagraph (A) or (C) (without regard to this subparagraph)—

(i) shall not be included in computing such shareholder's long-term capital gains, and

(ii) shall be included in such shareholder's gross income as a dividend from the real estate investment trust.

(F) Undistributed capital gain

For purposes of this paragraph, the term "undistributed capital gain" means the excess of the net capital gain over the deduction for dividends paid (as defined in section 561) determined with reference to capital gain dividends only.

(4) Income from foreclosure property

(A) Imposition of tax

A tax is hereby imposed for each taxable year on the net income from foreclosure property of every real estate investment trust. Such tax shall be computed by multiplying the net income from foreclosure property by the highest rate of tax specified in section 11(b).

(B) Net income from foreclosure property

For purposes of this part, the term "net income from foreclosure property" means the excess of—

(i) gain (including any foreign currency gain, as defined in section 988(b)(1)) from the sale or other disposition of foreclosure property described in section 1221(a)(1) and the gross income for the taxable year derived from foreclosure property (as defined in section 856(e)), but only to the extent such gross income is not described in (or, in the case of foreign currency gain, not attributable to gross income described in) section 856(c)(3) other than subparagraph (F) thereof, over

(ii) the deductions allowed by this chapter which are directly connected with the production of the income referred to in clause (i).

(5) Imposition of tax in case of failure to meet certain requirements

If section 856(c)(6) applies to a real estate investment trust for any taxable year, there is hereby imposed on such trust a tax in an amount equal to the greater of—

(A) the excess of—

(i) 95 percent of the gross income (excluding gross income from prohibited transactions) of the real estate investment trust, over

(ii) the amount of such gross income which is derived from sources referred to in section 856(c)(2); or

(B) the excess of—

(i) 75 percent of the gross income (excluding gross income from prohibited transactions) of the real estate investment trust, over

(ii) the amount of such gross income which is derived from sources referred to in section 856(c)(3),

multiplied by a fraction the numerator of which is the real estate investment trust taxable income for the taxable year (determined without regard to the deductions provided in paragraphs (2)(B) and (2)(E), without regard to any net operating loss deduction, and by excluding any net capital gain) and the denominator of which is the gross income for the taxable year (excluding gross income from prohibited transactions; gross income and gain from foreclosure property (as defined in section 856(e), but only to the extent such gross income and gain is not described in subparagraph (A), (B), (C), (D), (E), or (G) of section 856(c)(3)); long-term capital gain; and short-term capital gain to the extent of any short-term capital loss).

(6) Income from prohibited transactions

(A) Imposition of tax

There is hereby imposed for each taxable year of every real estate investment trust a tax equal to 100 percent of the net income derived from prohibited transactions.

(B) Definitions

For purposes of this part—

(i) the term "net income derived from prohibited transactions" means the excess of the gain (including any foreign currency gain, as defined in section 988(b)(1)) from prohibited transactions over the deductions (including any foreign currency loss, as defined in section 988(b)(2)) allowed by this chapter which are directly connected with prohibited transactions;

(ii) in determining the amount of the net income derived from prohibited transactions, there shall not be taken into account any item attributable to any prohibited transaction for which there was a loss; and

(iii) the term "prohibited transaction" means a sale or other disposition of property described in section 1221(a)(1) which is not foreclosure property.

(C) Certain sales not to constitute prohibited transactions

For purposes of this part, the term "prohibited transaction" does not include a sale of property which is a real estate asset (as defined in section 856(c)(5)(B)) if—

(i) the trust has held the property for not less than 2 years;

(ii) aggregate expenditures made by the trust, or any partner of the trust, during the 2-year period preceding the date of sale which are includible in the basis of the property do not exceed 30 percent of the net selling price of the property;

(iii)(I) during the taxable year the trust does not make more than 7 sales of property (other than sales of foreclosure property or sales to which section 1033 applies), or (II) the aggregate adjusted bases (as determined for purposes of computing earnings and profits) of property (other than sales of foreclosure property or sales to which section 1033 applies) sold during the taxable year does not exceed 10 percent of the aggregate bases (as so determined) of all of the assets of the trust as of the beginning of the taxable year, or (III) the fair market value of property (other than sales of foreclosure property or sales to which section 1033 applies) sold during the taxable year does not exceed 10 percent of the fair market value of all of the assets of the trust as of the beginning of the taxable year, or (IV) the trust satisfies the requirements of subclause (II) applied by substituting "20 percent" for "10 percent" and the 3-year average adjusted bases percentage for the taxable year (as defined in subparagraph (G)) does not exceed 10 percent, or (V) the trust satisfies the requirements of subclause (III) applied by substituting "20 percent" for "10 percent" and the 3-year average fair market value percentage for the taxable year (as defined in subparagraph (H)) does not exceed 10 percent;

(iv) in the case of property, which consists of land or improvements, not acquired through foreclosure (or deed in lieu of foreclosure), or lease termination, the trust has held the property for not less than 2 years for production of rental income; and

(v) if the requirement of clause (iii)(I) is not satisfied, substantially all of the marketing and development expenditures with respect to the property were made through an independent contractor (as defined in section 856(d)(3)) from whom the trust itself does not derive or receive any income or a taxable REIT subsidiary.

(D) Certain sales not to constitute prohibited transactions

For purposes of this part, the term "prohibited transaction" does not include a sale of property which is a real estate asset (as defined in section 856(c)(5)(B)) if—

(i) the trust held the property for not less than 2 years in connection with the trade or business of producing timber,

(ii) the aggregate expenditures made by the trust, or a partner of the trust, during the 2-year period preceding the date of sale which—

(I) are includible in the basis of the property (other than timberland acquisition expenditures), and

(II) are directly related to operation of the property for the production of timber or for the preservation of the property for use as timberland,

 do not exceed 30 percent of the net selling price of the property,

(iii) the aggregate expenditures made by the trust, or a partner of the trust, during the 2-year period preceding the date of sale which—

(I) are includible in the basis of the property (other than timberland acquisition expenditures), and

(II) are not directly related to operation of the property for the production of timber, or for the preservation of the property for use as timberland,

 do not exceed 5 percent of the net selling price of the property,

(iv)(I) during the taxable year the trust does not make more than 7 sales of property (other than sales of foreclosure property or sales to which section 1033 applies), or

(II) the aggregate adjusted bases (as determined for purposes of computing earnings and profits) of property (other than sales of foreclosure property or sales to which section 1033 applies) sold during the taxable year does not exceed 10 percent of the aggregate bases (as so determined) of all of the assets of the trust as of the beginning of the taxable year, or

(III) the fair market value of property (other than sales of foreclosure property or sales to which section 1033 applies) sold during the taxable year does not exceed 10 percent of the fair market value of all of the assets of the trust as of the beginning of the taxable year, or

(IV) the trust satisfies the requirements of subclause (II) applied by substituting "20 percent" for "10 percent" and the 3-year average adjusted bases percentage for the taxable year (as defined in subparagraph (G)) does not exceed 10 percent, or

(V) the trust satisfies the requirements of subclause (III) applied by substituting "20 percent" for "10 percent" and the 3-year average fair market value percentage for the taxable year (as defined in subparagraph (H)) does not exceed 10 percent,

(v) in the case that the requirement of clause (iv)(I) is not satisfied, substantially all of the marketing expenditures with respect to the property were made through an independent contractor (as defined in section 856(d)(3)) from whom the trust itself does not derive or receive any income, or a taxable REIT subsidiary, and

(vi) the sales price of the property sold by the trust is not based in whole or in part on income or profits, including income or profits derived from the sale or operation of such property.

(E) Special rules

In applying subparagraphs (C) and (D) the following special rules apply:

(i) The holding period of property acquired through foreclosure (or deed in lieu of foreclosure), or termination of the lease, includes the period for which the trust held the loan which such property secured, or the lease of such property.

(ii) In the case of a property acquired through foreclosure (or deed in lieu of foreclosure), or termination of a lease, expenditures made by, or for the account of, the mortgagor or lessee after default became imminent will be regarded as made by the trust.

(iii) Expenditures (including expenditures regarded as made directly by the trust, or indirectly by any partner of the trust, under clause (ii)) will not be taken into account if they relate to foreclosure property and did not cause the property to lose its status as foreclosure property.

(iv) Expenditures will not be taken into account if they are made solely to comply with standards or requirements of any government or governmental authority having relevant jurisdiction, or if they are made to restore the property as a result of losses arising from fire, storm or other casualty.

(v) The term "expenditures" does not include advances on a loan made by the trust.

(vi) The sale of more than one property to one buyer as part of one transaction constitutes one sale.

(vii) The term "sale" does not include any transaction in which the net selling price is less than $10,000.

(F) No inference with respect to treatment as inventory property

The determination of whether property is described in section 1221(a)(1) shall be made without regard to this paragraph.

(G) 3-year average adjusted bases percentage

The term "3-year average adjusted bases percentage" means, with respect to any taxable year, the ratio (expressed as a percentage) of—

(i) the aggregate adjusted bases (as determined for purposes of computing earnings and profits) of property (other than sales of foreclosure property or sales to which section 1033 applies) sold during the 3 taxable year period ending with such taxable year, divided by

(ii) the sum of the aggregate adjusted bases (as so determined) of all of the assets of the trust as of the beginning of each of the 3 taxable years which are part of the period referred to in clause (i).

(H) 3-year average fair market value percentage

The term "3-year average fair market value percentage" means, with respect to any taxable year, the ratio (expressed as a percentage) of—

(i) the fair market value of property (other than sales of foreclosure property or sales to which section 1033 applies) sold during the 3 taxable year period ending with such taxable year, divided by

(ii) the sum of the fair market value of all of the assets of the trust as of the beginning of each of the 3 taxable years which are part of the period referred to in clause (i).

(I) Sales of property that are not a prohibited transaction

In the case of a sale on or before the termination date, the sale of property which is not a prohibited transaction through the application of subparagraph (D) shall be considered property held for investment or for use in a trade or business and not property described in section 1221(a)(1) for all purposes of this subtitle. For purposes of the preceding sentence, the reference to subparagraph (D) shall be a reference to such subparagraph as in effect on the day before the enactment of the Housing Assistance Tax Act of 2008, as modified by subparagraph (G) as so in effect.

(J) Termination date

For purposes of this paragraph, the term "termination date" has the meaning given such term by section 856(c)(10).

(7) Income from redetermined rents, redetermined deductions, and excess interest

(A) Imposition of tax

There is hereby imposed for each taxable year of the real estate investment trust a tax equal to 100 percent of redetermined rents, redetermined deductions, excess interest, and redetermined TRS service income.

(B) Redetermined rents

(i) In general

The term "redetermined rents" means rents from real property (as defined in section 856(d)) to the extent the amount of the rents would (but for subparagraph (F)) be reduced on distribution, apportionment, or allocation under section 482 to clearly reflect income as a result of services furnished or rendered by a taxable REIT subsidiary of the real estate investment trust to a tenant of such trust.

(ii) Exception for de minimis amounts

Clause (i) shall not apply to amounts described in section 856(d)(7)(A) with respect to a property to the extent such amounts do not exceed the one percent threshold described in section 856(d)(7)(B) with respect to such property.

(iii) Exception for comparably priced services

Clause (i) shall not apply to any service rendered by a taxable REIT subsidiary of a real estate investment trust to a tenant of such trust if—

(I) such subsidiary renders a significant amount of similar services to persons other than such trust and tenants of such trust who are unrelated (within the meaning of section 856(d)(8)(F)) to such subsidiary, trust, and tenants, but

(II) only to the extent the charge for such service so rendered is substantially comparable to the charge for the similar services rendered to persons referred to in subclause (I).

(iv) Exception for certain separately charged services

Clause (i) shall not apply to any service rendered by a taxable REIT subsidiary of a real estate investment trust to a tenant of such trust if—

(I) the rents paid to the trust by tenants (leasing at least 25 percent of the net leasable space in the trust's property) who are not receiving such service from such subsidiary are substantially comparable to the rents paid by tenants leasing comparable space who are receiving such service from such subsidiary, and

(II) the charge for such service from such subsidiary is separately stated.

(v) Exception for certain services based on subsidiary's income from the services

Clause (i) shall not apply to any service rendered by a taxable REIT subsidiary of a real estate investment trust to a tenant of such trust if the gross income of such subsidiary from such service is not less than 150 percent of such subsidiary's direct cost in furnishing or rendering the service.

(vi) Exceptions granted by Secretary

The Secretary may waive the tax otherwise imposed by subparagraph (A) if the trust establishes to the satisfaction of the Secretary that rents charged to tenants were established on an arms' length basis even though a taxable REIT subsidiary of the trust provided services to such tenants.

(C) Redetermined deductions

The term "redetermined deductions" means deductions (other than redetermined rents) of a taxable REIT subsidiary of a real estate investment trust to the extent the amount of such deductions would (but for subparagraph (F)) be decreased on distribution, apportionment, or allocation under section 482 to clearly reflect income as between such subsidiary and such trust.

(D) Excess interest

The term "excess interest" means any deductions for interest payments by a taxable REIT subsidiary of a real estate investment trust to such trust to the extent that the interest payments are in excess of a rate that is commercially reasonable.

(E) Redetermined TRS service income

(i) In general

The term "redetermined TRS service income" means gross income of a taxable REIT subsidiary of a real estate investment trust attributable to services provided to, or on behalf of, such trust (less deductions properly allocable thereto) to the extent the amount of such income (less such deductions) would (but for subparagraph (F)) be increased on distribution, apportionment, or allocation under section 482.

(ii) Coordination with redetermined rents

Clause (i) shall not apply with respect to gross income attributable to services furnished or rendered to a tenant of the real estate investment trust (or to deductions properly allocable thereto).

(F) Coordination with section 482

The imposition of tax under subparagraph (A) shall be in lieu of any distribution, apportionment, or allocation under section 482.

(G) Regulatory authority

The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph. Until the Secretary prescribes such regulations, real estate investment trusts and their taxable REIT subsidiaries may base their allocations on any reasonable method.

(8) Loss on sale or exchange of stock held 6 months or less

(A) In general

If—

(i) subparagraph (B) or (D) of paragraph (3) provides that any amount with respect to any share or beneficial interest is to be treated as a long-term capital gain, and

(ii) the taxpayer has held such share or interest for 6 months or less,

then any loss on the sale or exchange of such share or interest shall, to the extent of the amount described in clause (i), be treated as a long-term capital loss.

(B) Determination of holding periods

For purposes of this paragraph, in determining the period for which the taxpayer has held any share of stock or beneficial interest—

(i) the rules of paragraphs (3) and (4) of section 246(c) shall apply, and

(ii) there shall not be taken into account any day which is more than 6 months after the date on which such share or interest becomes ex-dividend.

(C) Exception for losses incurred under periodic liquidation plans

To the extent provided in regulations, subparagraph (A) shall not apply to any loss incurred on the sale or exchange of shares of stock of, or beneficial interest in, a real estate investment trust pursuant to a plan which provides for the periodic liquidation of such shares or interests.

(9) Time certain dividends taken into account

For purposes of this title, any dividend declared by a real estate investment trust in October, November, or December of any calendar year and payable to shareholders of record on a specified date in such a month shall be deemed—

(A) to have been received by each shareholder on December 31 of such calendar year, and

(B) to have been paid by such trust on December 31 of such calendar year (or, if earlier, as provided in section 858).

The preceding sentence shall apply only if such dividend is actually paid by the company during January of the following calendar year.

(c) Restrictions applicable to dividends received from real estate investment trusts

(1) Section 243

For purposes of section 243 (relating to deductions for dividends received by corporations), a dividend received from a real estate investment trust which meets the requirements of this part shall not be considered a dividend.

(2) Section (1)(h)(11)

(A) In general

In any case in which—

(i) a dividend is received from a real estate investment trust (other than a capital gain dividend), and

(ii) such trust meets the requirements of section 856(a) for the taxable year during which it paid such dividend,

then, in computing qualified dividend income, there shall be taken into account only that portion of such dividend designated by the real estate investment trust.

(B) Limitation

The aggregate amount which may be designated as qualified dividend income under subparagraph (A) shall not exceed the sum of—

(i) the qualified dividend income of the trust for the taxable year,

(ii) the excess of—

(I) the sum of the real estate investment trust taxable income computed under section 857(b)(2) for the preceding taxable year and the income subject to tax by reason of the application of the regulations under section 337(d) for such preceding taxable year, over

(II) the sum of the taxes imposed on the trust for such preceding taxable year under section 857(b)(1) and by reason of the application of such regulations, and

(iii) the amount of any earnings and profits which were distributed by the trust for such taxable year and accumulated in a taxable year with respect to which this part did not apply.

(C) Notice to shareholders

The amount of any distribution by a real estate investment trust which may be taken into account as qualified dividend income shall not exceed the amount so designated by the trust in a written notice to its shareholders mailed not later than 60 days after the close of its taxable year.

(D) Qualified dividend income

For purposes of this paragraph, the term "qualified dividend income" has the meaning given such term by section 1(h)(11)(B).

(d) Earnings and profits

(1) In general

The earnings and profits of a real estate investment trust for any taxable year (but not its accumulated earnings) shall not be reduced by any amount which—

(A) is not allowable in computing its taxable income for such taxable year, and

(B) was not allowable in computing its taxable income for any prior taxable year.

(2) Coordination with tax on undistributed income

A real estate investment trust shall be treated as having sufficient earnings and profits to treat as a dividend any distribution (other than in a redemption to which section 302(a) applies) which is treated as a dividend by such trust. The preceding sentence shall not apply to the extent that the amount distributed during any calendar year by the trust exceeds the required distribution for such calendar year (as determined under section 4981).

(3) Distributions to meet requirements of subsection (a)(2)(B)

Any distribution which is made in order to comply with the requirements of subsection (a)(2)(B)—

(A) shall be treated for purposes of this subsection and subsection (a)(2)(B) as made from earnings and profits which, but for the distribution, would result in a failure to meet such requirements (and allocated to such earnings on a first-in, first-out basis), and

(B) to the extent treated under subparagraph (A) as made from accumulated earnings and profits, shall not be treated as a distribution for purposes of subsection (b)(2)(B) and section 858.

(4) Real estate investment trust

For purposes of this subsection, the term "real estate investment trust" includes a domestic corporation, trust, or association which is a real estate investment trust determined without regard to the requirements of subsection (a).

(5) Special rules for determining earnings and profits for purposes of the deduction for dividends paid

For special rules for determining the earnings and profits of a real estate investment trust for purposes of the deduction for dividends paid, see section 562(e)(1).

(e) Excess noncash income

(1) In general

For purposes of subsection (a)(1)(B), the term "excess noncash income" means the excess (if any) of—

(A) the amount determined under paragraph (2) for the taxable year, over

(B) 5 percent of the real estate investment trust taxable income for the taxable year determined without regard to the deduction for dividends paid (as defined in section 561) and by excluding any net capital gain.

(2) Determination of amount

The amount determined under this paragraph for the taxable year is the sum of—

(A) the amount (if any) by which—

(i) the amounts includible in gross income under section 467 (relating to certain payments for the use of property or services), exceed

(ii) the amounts which would have been includible in gross income without regard to such section,

(B) any income on the disposition of a real estate asset if—

(i) there is a determination (as defined in section 860(e)) that such income is not eligible for nonrecognition under section 1031, and

(ii) failure to meet the requirements of section 1031 was due to reasonable cause and not to willful neglect,

(C) the amount (if any) by which—

(i) the amounts includible in gross income with respect to instruments to which section 860E(a) or 1272 applies, exceed

(ii) the amount of money and the fair market value of other property received during the taxable year under such instruments, and

(D) amounts includible in income by reason of cancellation of indebtedness.

(f) Real estate investment trusts to ascertain ownership

(1) In general

Each real estate investment trust shall each taxable year comply with regulations prescribed by the Secretary for the purposes of ascertaining the actual ownership of the outstanding shares, or certificates of beneficial interest, of such trust.

(2) Failure to comply

(A) In general

If a real estate investment trust fails to comply with the requirements of paragraph (1) for a taxable year, such trust shall pay (on notice and demand by the Secretary and in the same manner as tax) a penalty of $25,000.

(B) Intentional disregard

If any failure under paragraph (1) is due to intentional disregard of the requirement under paragraph (1), the penalty under subparagraph (A) shall be $50,000.

(C) Failure to comply after notice

The Secretary may require a real estate investment trust to take such actions as the Secretary determines appropriate to ascertain actual ownership if the trust fails to meet the requirements of paragraph (1). If the trust fails to take such actions, the trust shall pay (on notice and demand by the Secretary and in the same manner as tax) an additional penalty equal to the penalty determined under subparagraph (A) or (B), whichever is applicable.

(D) Reasonable cause

No penalty shall be imposed under this paragraph with respect to any failure if it is shown that such failure is due to reasonable cause and not to willful neglect.

(g) Limitations on designation of dividends

(1) Overall limitation

The aggregate amount of dividends designated by a real estate investment trust under subsections (b)(3)(C) and (c)(2)(A) with respect to any taxable year may not exceed the dividends paid by such trust with respect to such year. For purposes of the preceding sentence, dividends paid after the close of the taxable year described in section 858 shall be treated as paid with respect to such year.

(2) Proportionality

The Secretary may prescribe regulations or other guidance requiring the proportionality of the designation of particular types of dividends among shares or beneficial interests of a real estate investment trust.

(h) Cross reference

For provisions relating to excise tax based on certain real estate investment trust taxable income not distributed during the taxable year, see section 4981.

(Added Pub. L. 86–779, §10(a), Sept. 14, 1960, 74 Stat. 1006; amended Pub. L. 88–272, title II, §201(d)(11), Feb. 26, 1964, 78 Stat. 32; Pub. L. 91–172, title V, §511(c)(3), Dec. 30, 1969, 83 Stat. 637; Pub. L. 93–625, §6(c), (d)(2)–(4), Jan. 3, 1975, 88 Stat. 2113, 2114; Pub. L. 94–455, title XIV, §1402(b)(1)(P), (2), title XVI, §§1601(c), 1602(b), 1603(b), (c)(5), 1604(c)(2), (f)(3)(B), (j), (k)(2)(B), 1605(b)(2), 1606(a), (d), 1607(a), (b)(1)(A), (2), (3), title XIX, §§1901(a)(112), (b)(1)(V), (33)(K), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1732, 1746–1748, 1750–1757, 1783, 1792, 1801, 1834; Pub. L. 95–600, title III, §§301(b)(12), 362(d)(3), 363(b), title IV, §403(c)(3), Nov. 6, 1978, 92 Stat. 2822, 2851, 2852, 2868; Pub. L. 96–222, title I, §103(a)(1), Apr. 1, 1980, 94 Stat. 208; Pub. L. 96–223, title IV, §404(b)(8), Apr. 2, 1980, 94 Stat. 307; Pub. L. 97–34, title III, §302(c)(5), (d)(1), Aug. 13, 1981, 95 Stat. 273, 274; Pub. L. 98–369, div. A, title I, §§16(a), 55(b), title X, §1001(b)(13), (e), July 18, 1984, 98 Stat. 505, 572, 1011, 1012; Pub. L. 99–514, title VI, §§612(b)(7), 661(b), 664, 665(a), (b)(1), 666, 668(b)(1)(A), (2), (3), Oct. 22, 1986, 100 Stat. 2251, 2300, 2303–2305, 2307, 2308; Pub. L. 100–647, title I, §§1006(r), (s)(2), (4), (5), 1018(u)(28), Nov. 10, 1988, 102 Stat. 3418, 3419, 3591; Pub. L. 101–508, title XI, §11704(a)(37), Nov. 5, 1990, 104 Stat. 1388–520; Pub. L. 105–34, title XII, §§1251(a), 1254(a), (b)(1), 1255(b)(2), (3), 1256, 1259, 1260, Aug. 5, 1997, 111 Stat. 1030, 1032–1035; Pub. L. 105–206, title VI, §6012(g), July 22, 1998, 112 Stat. 819; Pub. L. 106–170, title V, §§532(c)(2)(L), (M), 545, 556(a), (b), 566(a)(2), (b), Dec. 17, 1999, 113 Stat. 1930, 1944, 1949, 1950; Pub. L. 106–554, §1(a)(7) [title III, §311(b)], Dec. 21, 2000, 114 Stat. 2763, 2763A–640; Pub. L. 107–147, title IV, §§413(a), 417(13), Mar. 9, 2002, 116 Stat. 54, 56; Pub. L. 108–27, title III, §302(d), May 28, 2003, 117 Stat. 763; Pub. L. 108–311, title IV, §402(a)(5)(E), Oct. 4, 2004, 118 Stat. 1185; Pub. L. 108–357, title II, §243(c), (e), (f)(4), title III, §321(a), title IV, §418(b), Oct. 22, 2004, 118 Stat. 1442, 1445, 1473, 1512; Pub. L. 109–135, title IV, §§403(d)(3), 412(ii), Dec. 21, 2005, 119 Stat. 2622, 2639; Pub. L. 110–172, §11(a)(17)(B), Dec. 29, 2007, 121 Stat. 2486; Pub. L. 110–234, title XV, §§15311(c), 15315(a)–(d), May 22, 2008, 122 Stat. 1503–1505; Pub. L. 110–246, §4(a), title XV, §§15311(c), 15315(a)–(d), June 18, 2008, 122 Stat. 1664, 2265–2267; Pub. L. 110–289, div. C, title II, §§3033, 3051, 3052, July 30, 2008, 122 Stat. 2900, 2901; Pub. L. 114–113, div. Q, title III, §§313(a), (b), 316(a), 320(a), 321(a)(1), (2), (b), 322(a)(2)(B), Dec. 18, 2015, 129 Stat. 3091–3093, 3096, 3097, 3101; Pub. L. 115–97, title I, §13001(b)(2)(K), Dec. 22, 2017, 131 Stat. 2096; Pub. L. 115–141, div. U, title IV, §401(a)(148), Mar. 23, 2018, 132 Stat. 1191.)

Editorial Notes

References in Text

The date of enactment of the Housing Assistance Tax Act of 2008, referred to in subsec. (b)(6)(I), is the date of enactment of div. C of Pub. L. 110–289, which was approved July 30, 2008.

Codification

Pub. L. 110–234 and Pub. L. 110–246 made identical amendments to this section. The amendments by Pub. L. 110–234 were repealed by section 4(a) of Pub. L. 110–246.

Amendments

2018—Subsec. (b)(6)(J). Pub. L. 115–141 substituted "section 856(c)(10)" for "section 856(c)(8)".

2017—Subsec. (b)(3)(A), (B). Pub. L. 115–97, §13001(b)(2)(K)(i), redesignated subpars. (B) and (C) as (A) and (B), respectively, and struck out former subpar. (A) which related to alternative tax in case of capital gains.

Subsec. (b)(3)(C). Pub. L. 115–97, §13001(b)(2)(K)(i), redesignated subpar. (D) as (C). Former subpar. (C) redesignated (B).

Subsec. (b)(3)(C)(i), (ii), (iv). Pub. L. 115–97, §13001(b)(2)(K)(ii), substituted "paragraph (1)" for "subparagraph (A)(ii)" in cl. (i) and "the tax imposed by paragraph (1) on undistributed capital gain" for "the tax imposed by subparagraph (A)(ii)" in cls. (ii) and (iv).

Subsec. (b)(3)(D). Pub. L. 115–97, §13001(b)(2)(K)(i), redesignated subpar. (E) as (D). Former subpar. (D) redesignated (C).

Subsec. (b)(3)(E). Pub. L. 115–97, §13001(b)(2)(K)(i), (iii), redesignated subpar. (F) as (E) and substituted "subparagraph (A) or (C)" for "subparagraph (B) or (D)". Former subpar. (E) redesignated (D).

Subsec. (b)(3)(F). Pub. L. 115–97, §13001(b)(2)(K)(iv), added subpar. (F). Former subpar. (F) redesignated (E).

2015—Subsec. (b)(3)(F). Pub. L. 114–113, §322(a)(2)(B), inserted "or subparagraph (A)(ii) or (C) of section 897(k)(2)" after "897(h)(1)".

Subsec. (b)(6)(C). Pub. L. 114–113, §313(b)(1), in introductory provisions, struck out "and which is described in section 1221(a)(1)" after "(as defined in section 856(c)(5)(B))".

Subsec. (b)(6)(C)(iii)(IV), (V). Pub. L. 114–113, §313(a)(1), added subcls. (IV) and (V).

Subsec. (b)(6)(C)(v). Pub. L. 114–113, §321(a)(1), inserted "or a taxable REIT subsidiary" before period at end.

Subsec. (b)(6)(D). Pub. L. 114–113, §313(b)(1), in introductory provisions, struck out "and which is described in section 1221(a)(1)" after "(as defined in section 856(c)(5)(B))".

Subsec. (b)(6)(D)(iv)(IV), (V). Pub. L. 114–113, §313(a)(3), added subcls. (IV) and (V).

Subsec. (b)(6)(D)(v). Pub. L. 114–113, §321(a)(2), struck out ", in the case of a sale on or before the termination date," before "a taxable REIT subsidiary".

Subsec. (b)(6)(F). Pub. L. 114–113, §313(b)(2), amended subpar. (F) generally. Prior to amendment, text read as follows: "In determining whether or not any sale constitutes a 'prohibited transaction' for purposes of subparagraph (A), the fact that such sale does not meet the requirements of subparagraph (C) or (D) shall not be taken into account; and such determination, in the case of a sale not meeting such requirements, shall be made as if subparagraphs (C), (D), and (E) had not been enacted."

Subsec. (b)(6)(G) to (J). Pub. L. 114–113, §313(a)(2), added subpars. (G) and (H) and redesignated former subpars. (G) and (H) as (I) and (J), respectively.

Subsec. (b)(7)(A). Pub. L. 114–113, §321(b)(1), substituted "excess interest, and redetermined TRS service income" for "and excess interest".

Subsec. (b)(7)(B)(i), (C). Pub. L. 114–113, §321(b)(3), substituted "subparagraph (F)" for "subparagraph (E)".

Subsec. (b)(7)(E) to (G). Pub. L. 114–113, §321(b)(2), added subpar. (E) and redesignated former subpars. (E) and (F) as (F) and (G), respectively.

Subsec. (d)(1). Pub. L. 114–113, §320(a)(1), amended par. (1) generally. Prior to amendment, text read as follows: "The earnings and profits of a real estate investment trust for any taxable year (but not its accumulated earnings) shall not be reduced by any amount which is not allowable in computing its taxable income for such taxable year. For purposes of this subsection, the term 'real estate investment trust' includes a domestic corporation, trust, or association which is a real estate investment trust determined without regard to the requirements of subsection (a)."

Subsec. (d)(4), (5). Pub. L. 114–113, §320(a)(2), added pars. (4) and (5).

Subsecs. (g), (h). Pub. L. 114–113, §316(a), added subsec. (g) and redesignated former subsec. (g) as (h).

2008—Subsec. (b)(3)(A)(ii). Pub. L. 110–246, §15311(c), substituted "rates" for "rate".

Subsec. (b)(4)(B)(i). Pub. L. 110–289, §3033(a), amended cl. (i) generally. Prior to amendment, cl. (i) read as follows: "gain from the sale or other disposition of foreclosure property described in section 1221(a)(1) and the gross income for the taxable year derived from foreclosure property (as defined in section 856(e)), but only to the extent such gross income is not described in subparagraph (A), (B), (C), (D), (E), or (G) of section 856(c)(3), over".

Subsec. (b)(6)(B)(i). Pub. L. 110–289, §3033(b), amended cl. (i) generally. Prior to amendment, cl. (i) read as follows: "the term 'net income derived from prohibited transactions' means the excess of the gain from prohibited transactions over the deductions allowed by this chapter which are directly connected with prohibited transactions;".

Subsec. (b)(6)(C). Pub. L. 110–289, §3051(a)(3), substituted "real estate asset (as defined in section 856(c)(5)(B)) and which is described in section 1221(a)(1) if" for "real estate asset as defined in section 856(c)(5)(B) if" in introductory provisions.

Subsec. (b)(6)(C)(i). Pub. L. 110–289, §3051(a)(1), substituted "2 years" for "4 years".

Subsec. (b)(6)(C)(ii). Pub. L. 110–289, §3051(a)(2), substituted "2-year period" for "4-year period".

Subsec. (b)(6)(C)(iii)(III). Pub. L. 110–289, §3052(1), added subcl. (III).

Subsec. (b)(6)(C)(iv). Pub. L. 110–289, §3051(a)(1), substituted "2 years" for "4 years".

Subsec. (b)(6)(D). Pub. L. 110–289, §3051(a)(3), substituted "real estate asset (as defined in section 856(c)(5)(B)) and which is described in section 1221(a)(1) if" for "real estate asset (as defined in section 856(c)(5)(B)) if" in introductory provisions.

Subsec. (b)(6)(D)(i). Pub. L. 110–289, §3051(a)(1), substituted "2 years" for "4 years".

Subsec. (b)(6)(D)(ii), (iii). Pub. L. 110–289, §3051(a)(2), substituted "2-year period" for "4-year period" in introductory provisions.

Subsec. (b)(6)(D)(iv)(III). Pub. L. 110–289, §3052(2), added subcl. (III).

Subsec. (b)(6)(D)(v). Pub. L. 110–246, §15315(b), inserted ", or, in the case of a sale on or before the termination date, a taxable REIT subsidiary" after "any income".

Subsec. (b)(6)(G). Pub. L. 110–289, §3051(b), redesignated subpar. (H) as (G), inserted at end "For purposes of the preceding sentence, the reference to subparagraph (D) shall be a reference to such subparagraph as in effect on the day before the enactment of the Housing Assistance Tax Act of 2008, as modified by subparagraph (G) as so in effect.", and struck out former subpar. (G). Prior to amendment, text of subpar. (G) read as follows:

"(i) In general.—In the case of the sale of a real estate asset (as defined in section 856(c)(5)(B)) to a qualified organization (as defined in section 170(h)(3)) exclusively for conservation purposes (within the meaning of section 170(h)(1)(C)), subparagraph (D) shall be applied—

"(I) by substituting '2 years' for '4 years' in clause (i), and

"(II) by substituting '2-year period' for '4-year period' in clauses (ii) and (iii).

"(ii) Termination.—This subparagraph shall not apply to sales after the termination date."

Pub. L. 110–246, §15315(a), added subpar. (G).

Subsec. (b)(6)(H), (I). Pub. L. 110–289, §3051(b)(1), redesignated subpar. (I) as (H). Former subpar. (H) redesignated (G).

Pub. L. 110–246, §15315(c), (d), added subpars. (H) and (I).

2007—Subsec. (b)(8)(B). Pub. L. 110–172 amended heading and text generally. Prior to amendment, text read as follows: "For purposes of this paragraph, the rules of paragraphs (3) and (4) of section 246(c) shall apply in determining the period for which the taxpayer has held any share of stock or beneficial interest; except that '6 months' shall be substituted for the number of days specified in subparagraph (B) of section 246(c)(3)."

2005—Subsec. (b)(2)(E). Pub. L. 109–135, §403(d)(3), substituted "section 856(c)(7)(C), and section 856(g)(5)" for "section 856(c)(7)(B)(iii), and section 856(g)(1)."

Subsec. (b)(6)(E). Pub. L. 109–135, §412(ii)(1), substituted "subparagraphs (C) and (D)" for "subparagraph (C)" in introductory provisions.

Subsec. (b)(6)(F). Pub. L. 109–135, §412(ii)(2), substituted "subparagraph (C) or (D)" for "subparagraph (C) of this paragraph" and "subparagraphs (C), (D), and (E)" for "subparagraphs (C) and (D)".

2004—Subsec. (b)(2)(E). Pub. L. 108–357, §243(f)(4), substituted "(7) of this subsection, section 856(c)(7)(B)(iii), and section 856(g)(1)." for "(7)".

Subsec. (b)(3)(F). Pub. L. 108–357, §418(b), added subpar. (F).

Subsec. (b)(5)(A)(i). Pub. L. 108–357, §243(e), substituted "95 percent" for "90 percent".

Subsec. (b)(6)(D) to (F). Pub. L. 108–357, §321(a), added subpar. (D) and redesignated former subpars. (D) and (E) as (E) and (F), respectively.

Subsec. (b)(7)(B)(ii) to (vii). Pub. L. 108–357, §243(c), redesignated cls. (iii) to (vii) as (ii) to (vi), respectively, and struck out former cl. (ii), which related to exception for amounts received by a REIT for services furnished or rendered by a taxable REIT subsidiary that were described in section 856(d)(1)(B) of this title, or from a taxable REIT subsidiary that were described in par. (7)(C)(ii) of such section.

Subsec. (c)(2). Pub. L. 108–311, §402(a)(5)(E), reenacted heading without change and amended text generally. Prior to amendment, text related to rules applicable to dividends received from real estate investment trusts for purposes of section 1(h)(11) of this title.

2003—Subsec. (c). Pub. L. 108–27 reenacted subsec. heading without change and amended text generally. Prior to amendment, text read as follows: "For purposes of section 243 (relating to deductions for dividends received by corporations), a dividend received from a real estate investment trust which meets the requirements of this part shall not be considered as a dividend."

2002—Subsec. (b)(7)(B)(i). Pub. L. 107–147, §417(13), substituted "section 856(d)" for "subsection 856(d)".

Pub. L. 107–147, §413(a)(1), substituted "to the extent the amount of the rents" for "the amount of which".

Subsec. (b)(7)(C). Pub. L. 107–147, §413(a)(2), substituted "to the extent the amount" for "if the amount".

2000—Subsec. (b)(7)(B)(ii). Pub. L. 106–554 amended heading and text of cl. (ii) generally. Prior to amendment, text read as follows: "Clause (i) shall not apply to amounts received directly or indirectly by a real estate investment trust for services described in paragraph (1)(B) or (7)(C)(i) of section 856(d)."

1999—Subsec. (a)(1)(A)(i), (ii). Pub. L. 106–170, §556(a), substituted "90 percent" for "95 percent (90 percent for taxable years beginning before January 1, 1980)".

Subsec. (b)(2)(E). Pub. L. 106–170, §545(b), substituted "paragraphs (5) and (7)" for "paragraph (5)".

Subsec. (b)(4)(B)(i). Pub. L. 106–170, §532(c)(2)(L), substituted "section 1221(a)(1)" for "section 1221(1)".

Subsec. (b)(5)(A)(i). Pub. L. 106–170, §556(b), substituted "90 percent" for "95 percent (90 percent in the case of taxable years beginning before January 1, 1980)".

Subsec. (b)(6)(B)(iii). Pub. L. 106–170, §532(c)(2)(M), substituted "section 1221(a)(1)" for "section 1221(1)".

Subsec. (b)(7) to (9). Pub. L. 106–170, §545(a), added par. (7) and redesignated former pars. (7) and (8) as (8) and (9), respectively.

Subsec. (d)(3)(A). Pub. L. 106–170, §566(a)(2), amended subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: "shall be treated for purposes of this subsection and subsection (a)(2)(B) as made from the earliest earnings and profits accumulated in any taxable year to which the provisions of this part did not apply rather than the most recently accumulated earnings and profits, and".

Subsec. (d)(3)(B). Pub. L. 106–170, §566(b), inserted "and section 858" before period at end.

1998—Subsec. (d)(3)(A). Pub. L. 105–206 substituted "earliest earnings and profits accumulated in any taxable year to which the provisions of this part did not apply" for "earliest accumulated earnings and profits (other than earnings and profits to which subsection (a)(2)(A) applies)".

1997—Subsec. (a)(2), (3). Pub. L. 105–34, §1251(a)(1), redesignated par. (3) as (2) and struck out former par. (2) which read as follows: "the real estate investment trust complies for such year with regulations prescribed by the Secretary for the purpose of ascertaining the actual ownership of the outstanding shares, or certificates of beneficial interest, of such trust, and".

Subsec. (b)(3)(D), (E). Pub. L. 105–34, §1254(a), added subpar. (D) and redesignated former subpar. (D) as (E).

Subsec. (b)(5). Pub. L. 105–34, §1255(b)(2), substituted "section 856(c)(6)" for "section 856(c)(7)" in introductory provisions.

Subsec. (b)(6)(C). Pub. L. 105–34, §1255(b)(3), substituted "section 856(c)(5)(B)" for "section 856(c)(6)(B)" in introductory provisions.

Subsec. (b)(6)(C)(iii). Pub. L. 105–34, §1260, substituted "(other than sales of foreclosure property or sales to which section 1033 applies)" for "(other than foreclosure property)" in subcls. (I) and (II).

Subsec. (b)(7)(A)(i). Pub. L. 105–34, §1254(b)(1), substituted "subparagraph (B) or (D)" for "subparagraph (B)".

Subsec. (d)(3). Pub. L. 105–34, §1256, added par. (3).

Subsec. (e)(2)(B) to (D). Pub. L. 105–34, §1259, redesignated subpar. (C) as (B) and substituted a comma for period at end, added subpars. (C) and (D), and struck out former subpar. (B) which read as follows: "in the case of a real estate investment trust using the cash receipts and disbursements method of accounting, the amount (if any) by which—

"(i) the amounts includible in gross income with respect to instruments to which section 1274 (relating to certain debt instruments issued for property) applies, exceed

"(ii) the amount of money and the fair market value of other property received during the taxable year under such instruments; plus".

Subsecs. (f), (g). Pub. L. 105–34, §1251(a)(2), added subsec. (f) and redesignated former subsec. (f) as (g).

1990—Subsec. (b)(3)(C). Pub. L. 101–508 amended Pub. L. 100–647, §1018(u)(28). See 1988 Amendment note below.

1988—Subsec. (a). Pub. L. 100–647, §1006(s)(4), inserted at end "The Secretary may waive the requirements of paragraph (1) for any taxable year if the real estate investment trust establishes to the satisfaction of the Secretary that it was unable to meet such requirements by reason of distributions previously made to meet the requirements of section 4981."

Subsec. (b)(3)(C). Pub. L. 100–647, §1018(u)(28), as amended by Pub. L. 101–508, substituted "such net capital loss shall" for "such net capital loss such".

Pub. L. 100–647, §1006(s)(2), substituted "the taxable income of the real estate investment trust" for "real estate investment trust taxable income".

Subsec. (b)(8). Pub. L. 100–647, §1006(s)(5), substituted "in October, November, or December" for "in December" and "in such a month" for "in such month" in introductory text, "on December 31 of such calendar year" for "on such date", in subpars. (A) and (B), and "during January" for "before February 1" in last sentence.

Subsec. (e)(2)(B)(i). Pub. L. 100–647, §1006(r), substituted "with respect to instruments" for "as original issue discount on instruments".

1986—Subsec. (a). Pub. L. 99–514, §661(b), struck out "and" at end of par. (1), substituted ", and" for the period at end of par. (2), and added par. (3) and last sentence.

Subsec. (a)(1)(B). Pub. L. 99–514, §664(a), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: "the sum of—

"(i) the amount of any penalty imposed on the real estate investment trust by section 6697 which is paid by such trust during the taxable year; and

"(ii) the net loss derived from prohibited transactions,".

Subsec. (b)(2)(F). Pub. L. 99–514, §666(b)(2), struck out "and there shall be included an amount equal to any net loss derived from prohibited transactions" after "prohibited transactions".

Subsec. (b)(3)(C). Pub. L. 99–514, §668(b)(3), inserted at end "For purposes of this subparagraph, the amount of the net capital gain for any taxable year which is not a calendar year shall be determined without regard to any net capital loss attributable to transactions after December 31 of such year, and any such net capital loss such be treated as arising on the 1st day of the next taxable year. To the extent provided in regulations, the preceding sentence shall apply also for purposes of computing real estate investment trust taxable income."

Pub. L. 99–514, §665(a)(2), (b)(1), inserted "(or mailed to its shareholders or holders of beneficial interests with its annual report for the taxable year)", struck out last sentence which read as follows: "For purposes of this subparagraph, the net capital gain shall be deemed not to exceed the real estate investment trust taxable income (determined without regard to the deduction for dividends paid (as defined in section 561) for the taxable year)."

Subsec. (b)(3)(D). Pub. L. 99–514, §665(a)(1), added subpar. (D).

Subsec. (b)(6)(B)(ii). Pub. L. 99–514, §666(b)(1), amended cl. (ii) generally. Prior to amendment, cl. (ii) read as follows: "the term 'net loss derived from prohibited transactions' means the excess of the deductions allowed by this chapter which are directly connected with prohibited transactions over the gain from prohibited transactions; and".

Subsec. (b)(6)(C)(ii). Pub. L. 99–514, §666(a)(2), substituted "30 percent" for "20 percent".

Subsec. (b)(6)(C)(iii). Pub. L. 99–514, §666(a)(1), amended cl. (iii) generally. Prior to amendment, cl. (iii) read as follows: "during the taxable year the trust does not make more than 5 sales of property (other than foreclosure property); and".

Subsec. (b)(6)(C)(v). Pub. L. 99–514, §666(a)(3), added cl. (v).

Subsec. (b)(8). Pub. L. 99–514, §668(b)(1)(A), added par. (8).

Subsec. (c). Pub. L. 99–514, §612(b)(7), which directed that "section 116 (relating to an exclusion for dividends received by individuals), and" be struck out, was executed by striking out "section 116 (relating to an exclusion for dividends received by individuals) and" before "section 243" as the probable intent of Congress.

Subsec. (d). Pub. L. 99–514, §668(b)(2), amended subsec. (d) generally. Prior to amendment, subsec. (d) read as follows: "The earnings and profits of a real estate investment trust for any taxable year (but not its accumulated earnings and profits) shall not be reduced by any amount which is not allowable as a deduction in computing its taxable income for such taxable year. For purposes of this subsection, the term 'real estate investment trust' includes a domestic corporation, trust, or association which is a real estate investment trust determined without regard to the requirements of subsection (a)."

Subsecs. (e), (f). Pub. L. 99–514, §664(b), added subsec. (e) and redesignated former subsec. (e) as (f).

1984—Subsec. (b)(3)(B). Pub. L. 98–369, §1001(b)(13), (e), substituted "6 months" for "1 year", applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below.

Subsec. (b)(7). Pub. L. 98–369, §55(b), substituted provisions relating to loss on sale or exchange of stock held 6 months or less for provisions which related to loss on sale or exchange of stock held 31 days or less.

Pub. L. 98–369, §1001(b)(13), (e), substituted "6 months" for "1 year", applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below.

Subsec. (c). Pub. L. 98–369, §16(a), repealed amendments made by Pub. L. 97–34, §302(c). See 1981 Amendment note below.

1981—Subsec. (c). Pub. L. 97–34, §302(c)(5), (d)(1), provided for general amendment of subsec. (c) so as to include provisions relating to treatment for section 128 of this title, adjustments to gross income and aggregate interest received, and notice to shareholders, applicable to taxable years beginning after Dec. 31, 1984. Section 16(a) of Pub. L. 98–369, repealed section 302(c) of Pub. L. 97–34, and provided that this title shall be applied and administered as if section 302(c), and the amendments made by section 302(c), had not been enacted.

1980—Subsec. (b)(4)(A). Pub. L. 96–222 substituted provisions computing the tax on the net income from foreclosure property of every real estate investment trust by multiplying the net income from foreclosure property by the highest rate of tax specified in section 11(b) for provisions determining the tax on the net income from foreclosure of property of every real estate investment trust by applying section 11 to such income as if such income constituted the taxable income of a corporation taxable under section 11 and struck out provisions requiring that for purposes of the preceding sentence, the surtax exemption be zero.

Subsec. (c). Pub. L. 96–223 temporarily substituted "Limitations applicable to dividends received from real estate investment trusts" for "Restrictions applicable to dividends received from real estate investment trusts" in heading, designated existing provisions as par. (1), substituted "(1) Capital gain dividend.—For purposes of section 116 (relating to exclusion for dividends and interest received by individuals), a capital gain dividend (as defined in subsection (b)(3)(C)) received from a real estate investment trust shall not be considered a dividend" for "For purposes of section 116 (relating to an exclusion for dividends received by individuals) and section 243 (relating to deductions for dividends received by corporations), a dividend received from a real estate investment trust which meets the requirements of this part shall not be considered as a dividend" in par. (1) as so designated, and added pars. (2) to (6).

1978—Subsec. (b)(1). Pub. L. 95–600, §301(b)(12), substituted "a tax" for "a normal tax and surtax".

Subsec. (b)(3)(A)(ii). Pub. L. 95–600, §403(c)(3), substituted "a tax determined at the rate provided in section 1201(a) on" for "a tax of 30 percent of".

Subsec. (b)(3)(C). Pub. L. 95–600, §362(d)(3), substituted "section 860(e)" for "section 859(c)".

Subsec. (b)(6)(C) to (E). Pub. L. 95–600, §363(b), added subpars. (C) to (E).

1976—Subsec. (a). Pub. L. 94–455, §§1604(j), (k)(2)(B), 1906(b)(13)(A), substituted "(other than subsection (d) of this section and subsection (g) of section 856)" for "(other than subsection (d) of this section)" in provisions preceding par. (1), in par. (1) redesignated existing subpars. (A) and (B) as cls. (i) and (ii), respectively, of subpar. (A), added subpar. (B), in both cls. (i) and (ii) of subpar. (A) as redesignated raised the percentage to 95 percent for taxable years beginning on and after Jan. 1, 1980, and, in cl. (i) of subpar. (A) as redesignated, inserted provision for the exclusion of net capital gain, and struck out "or his delegate" after "Secretary" in par. (2).

Subsec. (b)(1). Pub. L. 94–455, §1901(b)(1)(V), struck out provision that, for purposes of computing the normal tax under section 11, the taxable income and the dividends paid deduction of such real estate investment trust for the taxable year (computed without regard to capital gains dividends) would be reduced by the deduction provided by section 22 (relating to partially tax-exempt interest.

Subsec. (b)(2). Pub. L. 94–455, §§1602(b)(2), 1603(c)(5), 1606(a), (d), 1607(b)(1)(A), (2), struck out subpar. (A) which provided for the exclusion of the excess, if any, of the net long-term capital gain over the net short-term capital loss, and subpar. (E) which prohibited the allowance of the net operating loss deduction provided in section 172, redesignated subpars. (B), (C), (D), and (F) as subpars. (A), (B), (C), and (D), respectively, added subpars. (E) and (F), and in subpar. (B) as redesignated substituted "subparagraph (D)" for "paragraph (F)" and struck out "shall be computed without regard to capital gains dividends and" after "shall be allowed, but".

Subsec. (b)(3)(A). Pub. L. 94–455, §1607(a), substituted provisions setting an alternative tax in case of capital gains under which, if for any taxable year, a real estate investment trust has a net capital gain, then, in lieu of the tax imposed by subsection (b)(1), there is imposed a tax (if such tax is less than the tax imposed by such subsection) to consist of the sum of a tax, computed as provided in subsection (b)(1), on the real estate investment trust taxable income (determined by excluding such net capital gain and by computing the deduction for dividends paid without regard to capital gain dividends), and a tax of 30 percent of the excess of the net capital gain over the deduction for dividends paid (as defined in section 561) determined with reference to capital gains dividends only, for provisions posing a tax for each taxable year determined as provided in section 1201(a), on the excess, if any, of the net long-term capital gain over the sum of the net short-term capital loss and the deduction for dividends paid (as defined in section 561) determined with reference to capital gains dividends only.

Subsec. (b)(3)(B). Pub. L. 94–455, §1402(b)(2), provided that "9 months" would be changed to "1 year".

Pub. L. 94–455, §1402(b)(1)(P), provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977.

Subsec. (b)(3)(C). Pub. L. 94–455, §§1601(c), 1607(b)(3), 1901(a)(112), (b)(33)(K), inserted "; except that, if there is an increase in the excess described in subparagraph (A)(ii) of this paragraph for such year which results from a determination (as defined in section 859(c)), such designation may be made with respect to such increase at any time before the expiration of 120 days after the date of such determination" after "30 days after the close of its taxable year", substituted "net capital gain" for "excess of the net long-term capital gain over the net short-term capital loss" in provision covering the portion of distributions which shall be capital gain dividends, inserted provision that the net capital gain be deemed not to exceed the real estate investment trust taxable income, and struck out provision which specified the source of deductions for dividends paid in the case of taxable years beginning before Jan. 1, 1975.

Subsec. (b)(4)(B)(i). Pub. L. 94–455, §1604(c)(2), inserted reference to subparagraph (G) of section 856(c)(3).

Subsec. (b)(5). Pub. L. 94–455, §1602(b)(1), added par. (5). Former par. (5) redesignated (7) and amended.

Subsec. (b)(6). Pub. L. 94–455, §1603(b), added par. (6).

Subsec. (b)(7). Pub. L. 94–455, §1402(b)(2), provided that "9 months" would be changed to "1 year".

Pub. L. 94–455, §§1402(b)(1)(P), 1602(b)(1), redesignated par. (5) as (7) and provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977.

Subsec. (d). Pub. L. 94–455, §1604(f)(3)(B), substituted "a domestic corporation, trust," for "a domestic unincorporated trust".

Subsec. (e). Pub. L. 94–455, §1605(b)(2), added subsec. (e).

1975—Subsec. (a)(1). Pub. L. 93–625, §6(d)(2), incorporated existing par. (1) provisions in par. (1) introductory text and provisions designated as subpar. (A), substituted in subpar. (A) "(determined without regard to the deduction for dividends paid (as defined in section 561))" for "(determined without regard to subsection (b)(2)(C))", and added subpar. (B).

Subsec. (b)(2)(C). Pub. L. 93–625, §6(d)(4), provided for computation of deduction for dividends paid without regard to that portion of such deduction which is attributable to the amount excluded under subparagraph (F).

Subsec. (b)(2)(F). Pub. L. 93–625, §6(d)(3), added subpar. (F).

Subsec. (b)(4), (5). Pub. L. 93–625, §6(c), added par. (4) and redesignated former par. (4) as (5).

1969—Subsec. (b)(3)(A). Pub. L. 91–172, §511(c)(3)(A), substituted "determined as provided in section 1201(a), on" for "of 25 percent of."

Subsec. (b)(3)(C). Pub. L. 91–172, §511(c)(3)(B), inserted provision requiring for the purposes of the deduction for capital gains dividends paid, in the case of a taxable year beginning before Jan. 1, 1975, the deduction for dividends paid shall first be made from the amount subject to tax in accordance with section 1201(a)(1)(B), to the extent thereof, and then from the amount subject to tax in accordance with section 1201(a)(1)(A).

1964—Subsec. (c). Pub. L. 88–272 struck out "section 34(a) (relating to credit for dividends received by individuals)," before "section 116" and the comma before "and".

Statutory Notes and Related Subsidiaries

Effective Date of 2017 Amendment

Amendment by Pub. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, see section 13001(c)(1) of Pub. L. 115–97, set out as a note under section 11 of this title.

Effective Date of 2015 Amendment

Pub. L. 114–113, div. Q, title III, §313(c), Dec. 18, 2015, 129 Stat. 3092, provided that:

"(1) In general.—The amendments made by subsection (a) [amending this section] shall apply to taxable years beginning after the date of the enactment of this Act [Dec. 18, 2015].

"(2) Application of safe harbors.—

"(A) In general.—Except as provided in subparagraph (B), the amendments made by subsection (b) [amending this section] shall take effect as if included in section 3051 of the Housing Assistance Tax Act of 2008 [Pub. L. 110–289].

"(B) Retroactive application of no inference not applicable to certain timber property previously treated as not inventory property.—The amendment made by subsection (b)(2) [amending this section] shall not apply to any sale of property to which section 857(b)(6)(G) of the Internal Revenue Code of 1986 (as in effect on the day before the date of the enactment of this Act) applies."

Pub. L. 114–113, div. Q, title III, §316(b), Dec. 18, 2015, 129 Stat. 3094, provided that: "The amendments made by this section [amending this section] shall apply to distributions in taxable years beginning after December 31, 2015."

Amendment by section 320(a) of Pub. L. 114–113 applicable to taxable years beginning after Dec. 31, 2015, see section 320(c) of Pub. L. 114–113, set out as a note under section 562 of this title.

Amendment by section 321(a)(1), (2), (b) of Pub. L. 114–113 applicable to taxable years beginning after Dec. 31, 2015, see section 321(c) of Pub. L. 114–113, set out as a note under section 856 of this title.

Pub. L. 114–113, div. Q, title III, §322(c)(1), Dec. 18, 2015, 129 Stat. 3102, provided that:

"(1) In general.—The amendments made by subsection (a) [amending this section and section 897 of this title] shall take effect on the date of enactment [Dec. 18, 2015] and shall apply to—

"(A) any disposition on and after the date of the enactment of this Act, and

"(B) any distribution by a real estate investment trust on or after the date of the enactment of this Act which is treated as a deduction for a taxable year of such trust ending after such date."

Effective Date of 2008 Amendment

Amendment by section 3033(a) of Pub. L. 110–289 applicable to gains recognized after July 30, 2008, and amendment by section 3033(b) of Pub. L. 110–289 applicable to gains and deductions recognized after July 30, 2008, see section 3071(c) of Pub. L. 110–289, set out as a note under section 856 of this title.

Amendment by sections 3051 and 3052 of Pub. L. 110–289 applicable to sales made after July 30, 2008, see section 3071(d) of Pub. L. 110–289, set out as a note under section 856 of this title.

Amendment of this section and repeal of Pub. L. 110–234 by Pub. L. 110–246 effective May 22, 2008, the date of enactment of Pub. L. 110–234, except as otherwise provided, see section 4 of Pub. L. 110–246, set out as an Effective Date note under section 8701 of Title 7, Agriculture.

Amendment by section 15311(c) of Pub. L. 110–246 applicable to taxable years ending after June 18, 2008, see section 15311(d) of Pub. L. 110–246, set out as a note under section 55 of this title.

Pub. L. 110–234, title XV, §15315(e), May 22, 2008, 122 Stat. 1505, and Pub. L. 110–246, §4(a), title XV, §15315(e), June 18, 2008, 122 Stat. 1664, 2267, provided that: "The amendments made by this section [amending this section] shall apply to dispositions in taxable years beginning after the date of the enactment of this Act [June 18, 2008]."

[Pub. L. 110–234 and Pub. L. 110–246 enacted identical provisions. Pub. L. 110–234 was repealed by section 4(a) of Pub. L. 110–246, set out as a note under section 8701 of Title 7, Agriculture.]

Effective Date of 2005 Amendment

Amendment by section 403(d)(3) of Pub. L. 109–135 effective as if included in the provision of the American Jobs Creation Act of 2004, Pub. L. 108–357, to which such amendment relates, see section 403(nn) of Pub. L. 109–135, set out as a note under section 26 of this title.

Effective Date of 2004 Amendments

Amendment by section 243(c), (e) of Pub. L. 108–357 applicable to taxable years beginning after Oct. 22, 2004, and amendment by section 243(f)(4) of Pub. L. 108–357 applicable to taxable years ending after Oct. 22, 2004, see section 243(g)(2), (4)(D) of Pub. L. 108–357, set out as a note under section 856 of this title.

Pub. L. 108–357, title III, §321(b), Oct. 22, 2004, 118 Stat. 1474, provided that: "The amendments made by this section [amending this section] shall apply to taxable years beginning after the date of the enactment of this Act [Oct. 22, 2004]."

Pub. L. 108–357, title IV, §418(c), Oct. 22, 2004, 118 Stat. 1513, as amended by Pub. L. 109–135, title IV, §403(p)(2), Dec. 21, 2005, 119 Stat. 2626, provided that: "The amendments made by this section [amending this section and section 897 of this title] shall apply to—

"(1) any distribution by a real estate investment trust which is treated as a deduction for a taxable year of such trust beginning after the date of the enactment of this Act [Oct. 22, 2004], and

"(2) any distribution by a real estate investment trust made after such date which is treated as a deduction under section 860 [probably means section 860 of the Internal Revenue Code of 1986] for a taxable year of such trust beginning on or before such date."

Amendment by Pub. L. 108–311 effective as if included in section 302 of the Jobs and Growth Tax Relief Reconciliation Act of 2003, Pub. L. 108–27, see section 402(b) of Pub. L. 108–311, set out a note under section 1 of this title.

Effective Date of 2003 Amendment

Amendment by Pub. L. 108–27 applicable, except as otherwise provided, to taxable years beginning after Dec. 31, 2002, see section 302(f) of Pub. L. 108–27, set out as an Effective and Termination Dates of 2003 Amendment note under section 1 of this title.

Effective Date of 2002 Amendment

Pub. L. 107–147, title IV, §413(b), Mar. 9, 2002, 116 Stat. 54, provided that: "The amendments made by this section [amending this section] shall take effect as if included in section 545 of the Tax Relief Extension Act of 1999 [Pub. L. 106–170]."

Effective Date of 2000 Amendment

Amendment by Pub. L. 106–554 effective as if included in the provisions of the Ticket to Work and Work Incentives Improvement Act of 1999, Pub. L. 106–170, to which such amendment relates, see section 1(a)(7) [title III, §311(d)] of Pub. L. 106–554, set out as a note under section 280C of this title.

Effective Date of 1999 Amendment

Amendment by section 532(c)(2)(L), (M) of Pub. L. 106–170 applicable to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after Dec. 17, 1999, see section 532(d) of Pub. L. 106–170, set out as a note under section 170 of this title.

Amendment by section 545 of Pub. L. 106–170 applicable to taxable years beginning after Dec. 31, 2000, see section 546(a) of Pub. L. 106–170, set out as a note under section 856 of this title.

Pub. L. 106–170, title V, §556(c), Dec. 17, 1999, 113 Stat. 1949, provided that: "The amendments made by this section [amending this section] shall apply to taxable years beginning after December 31, 2000."

Amendment by section 566(a)(2), (b) of Pub. L. 106–170 applicable to distributions after Dec. 31, 2000, see section 566(d) of Pub. L. 106–170, set out as a note under section 852 of this title.

Effective Date of 1998 Amendment

Amendment by Pub. L. 105–206 effective, except as otherwise provided, as if included in the provisions of the Taxpayer Relief Act of 1997, Pub. L. 105–34, to which such amendment relates, see section 6024 of Pub. L. 105–206, set out as a note under section 1 of this title.

Effective Date of 1997 Amendment

Amendment by Pub. L. 105–34 applicable to taxable years beginning after Aug. 5, 1997, see section 1263 of Pub. L. 105–34, set out as a note under section 852 of this title.

Effective Date of 1988 Amendment

Pub. L. 100–647, title I, §1006(s)(5), Nov. 10, 1988, 102 Stat. 3419, provided that the amendment made by that section is effective with respect to dividends declared in 1988 and subsequent calendar years.

Amendment by sections 1006(r), (s)(2), (4) and 1018(u)(28) of Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

Effective Date of 1986 Amendment

Amendment by section 612(b)(7) of Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, see section 612(c) of Pub. L. 99–514, set out as a note under section 301 of this title.

Amendments by sections 661(b), 664, 665(a), (b)(1), and 666 of Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, see section 669(a) of Pub. L. 99–514, set out as a note under section 856 of this title.

Amendment by section 668(b)(1)(A), (2), (3) of Pub. L. 99–514 applicable to calendar years beginning after Dec. 31, 1986, see section 669(b) of Pub. L. 99–514, set out as a note under section 856 of this title.

Effective Date of 1984 Amendment

Amendment by section 16(a) of Pub. L. 98–369 applicable to taxable years ending after Dec. 31, 1983, see section 18(a) of Pub. L. 98–369, set out as a note under section 48 of this title.

Amendment by section 55(b) of Pub. L. 98–369 applicable to losses incurred with respect to shares of stock and beneficial interest with respect to which the taxpayer's holding period begins after July 18, 1984, see section 55(c) of Pub. L. 98–369, set out as a note under section 852 of this title.

Amendment by section 1001(b)(13) of Pub. L. 98–369 applicable to property acquired after June 22, 1984, and before Jan. 1, 1988, see section 1001(e) of Pub. L. 98–369, set out as a note under section 166 of this title.

Effective Date of 1980 Amendment

Amendment by Pub. L. 96–222 effective, except as otherwise provided, as if it had been included in the provisions of the Revenue Act of 1978, Pub. L. 95–600, to which such amendment relates, see section 201 of Pub. L. 96–222, set out as a note under section 32 of this title.

Effective and Termination Dates of 1980 Amendment

Amendment by Pub. L. 96–223 applicable with respect to taxable years beginning after Dec. 31, 1980, and before Jan. 1, 1982, see section 404(c) of Pub. L. 96–223, set out as a note under section 265 of this title.

Effective Date of 1978 Amendment

Amendment by section 301(b)(12) of Pub. L. 95–600 applicable to taxable years beginning after Dec. 31, 1978, see section 301(c) of Pub. L. 95–600, set out as a note under section 11 of this title.

Amendment by section 362(d)(3) of Pub. L. 95–600 applicable with respect to determinations (as defined in section 860(e) of this title) after Nov. 6, 1978, see section 362(e) of Pub. L. 95–600, set out as an Effective Date note under section 860 of this title.

Amendment by section 363(b) of Pub. L. 95–600 applicable to taxable years ending after Nov. 6, 1978, see section 363(d) of Pub. L. 95–600, set out as a note under section 856 of this title.

Amendment by section 403(c)(3) of Pub. L. 95–600 effective on Nov. 6, 1978, see section 403(d)(3) of Pub. L. 95–600, set out as a note under section 528 of this title.

Effective Date of 1976 Amendment

Pub. L. 94–455, title XIV, §1402(b)(1), Oct. 4, 1976, 90 Stat. 1731, provided that the amendment made by that section is effective with respect to taxable years beginning in 1977.

Pub. L. 94–455, title XIV, §1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, provided that the amendment made by that section is effective with respect to taxable years beginning after Dec. 31, 1977.

Pub. L. 94–455, title XVI, §1608(a), Oct. 4, 1976, 90 Stat. 1757, as amended by Pub. L. 99–514, §2, Oct. 22, 1986, 100 Stat. 2095, provided that: "The amendments made by section 1601 [enacting sections 859 and 6697 of this title and amending this section and sections 316, 381, 6422, 6503, and 6515 of this title] shall apply with respect to determinations (as defined in section 859(c) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]) occurring after the date of the enactment of this Act [Oct. 4, 1976]. If the amendments made by section 1601 apply to a taxable year ending on or before the date of enactment of this Act:

"(1) the reference to [former] section 857(b)(3)(A)(ii) in sections 857(b)(3)(C) [now 857(b)(3)(B)] and 859(b)(1)(B) of such Code as amended, shall be considered to be a reference to [former] section 857(b)(3)(A) of such Code, as in effect immediately before the enactment of this Act [Oct. 4, 1976], and

"(2) the reference to section 857(b)(2)(B) in section 859(a) of such Code, as amended, shall be considered to be a reference to section 857(b)(2)(C) of such Code, as in effect immediately before the enactment of this Act [Oct. 4, 1976]."

For effective date of amendment by section 1602(b)(1), (2) of Pub. L. 94–455, see section 1608(b) of Pub. L. 94–455, set out as a Trust Not Disqualified in Certain Cases Where Income Tests Not Met note under section 856 of this title.

For effective date of amendment by sections 1603, 1604, and 1605 of Pub. L. 94–455, see section 1608(d) of Pub. L. 94–455, set out as a note under section 856 of this title.

Pub. L. 94–455, title XVI, §1608(c), Oct. 4, 1976, 90 Stat. 1757, as amended by Pub. L. 99–514, §2, Oct. 22, 1986, 100 Stat. 2095, provided that: "The amendments made by sections 1606 and 1607 [amending this section and sections 46, 172, and 443 of this title] shall apply to taxable years ending after the date of the enactment of this Act [Oct. 4, 1976]; except that in the case of a taxpayer which has a net operating loss (as defined in section 172(c) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]) for any taxable year ending after the date of enactment of this Act [Oct. 4, 1976] for which the provisions of part II of subchapter M of chapter 1 of subtitle A of such Code apply to such taxpayer, such loss shall not be a net operating loss carryback under section 172 of such Code to any taxable year ending on or before the date of enactment of this Act [Oct. 4, 1976]."

Amendment by section 1901(a)(112), (b)(1)(V), (33)(K) of Pub. L. 94–455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title.

Effective Date of 1975 Amendment

Amendment by Pub. L. 93–625 applicable to foreclosure property acquired after Dec. 31, 1973, see section 6(e) of Pub. L. 93–625, set out as a note under section 856 of this title.

Effective Date of 1969 Amendment

Amendment by Pub. L. 91–172 applicable with respect to taxable years beginning after Dec. 31, 1969, see section 511(d) of Pub. L. 91–172, set out as an Effective Date note under section 852 of this title.

Effective Date of 1964 Amendment

Amendment by Pub. L. 88–272 applicable with respect to dividends received after Dec. 31, 1964, in taxable years ending after such date, see section 201(e) of Pub. L. 88–272, set out as a note under section 22 of this title.

Effective Date

Section applicable with respect to taxable years of real estate investment trusts beginning after Dec. 31, 1960, see section 10(k) of Pub. L. 86–779, set out as a note under section 856 of this title.
26 U.S.C. § 220 (2024) — Title 26: INTERNAL REVENUE CODE / Chapter 1 / Section 220: Archer MSAs
Archer MSAs
Status: in_force

(a) Deduction allowed

In the case of an individual who is an eligible individual for any month during the taxable year, there shall be allowed as a deduction for the taxable year an amount equal to the aggregate amount paid in cash during such taxable year by such individual to an Archer MSA of such individual.

(b) Limitations

(1) In general

The amount allowable as a deduction under subsection (a) to an individual for the taxable year shall not exceed the sum of the monthly limitations for months during such taxable year that the individual is an eligible individual.

(2) Monthly limitation

The monthly limitation for any month is the amount equal to 1/12 of—

(A) in the case of an individual who has self-only coverage under the high deductible health plan as of the first day of such month, 65 percent of the annual deductible under such coverage, and

(B) in the case of an individual who has family coverage under the high deductible health plan as of the first day of such month, 75 percent of the annual deductible under such coverage.

(3) Special rule for married individuals

In the case of individuals who are married to each other, if either spouse has family coverage—

(A) both spouses shall be treated as having only such family coverage (and if such spouses each have family coverage under different plans, as having the family coverage with the lowest annual deductible), and

(B) the limitation under paragraph (1) (after the application of subparagraph (A) of this paragraph) shall be divided equally between them unless they agree on a different division.

(4) Deduction not to exceed compensation

(A) Employees

The deduction allowed under subsection (a) for contributions as an eligible individual described in subclause (I) of subsection (c)(1)(A)(iii) shall not exceed such individual's wages, salaries, tips, and other employee compensation which are attributable to such individual's employment by the employer referred to in such subclause.

(B) Self-employed individuals

The deduction allowed under subsection (a) for contributions as an eligible individual described in subclause (II) of subsection (c)(1)(A)(iii) shall not exceed such individual's earned income (as defined in section 401(c)(1)) derived by the taxpayer from the trade or business with respect to which the high deductible health plan is established.

(C) Community property laws not to apply

The limitations under this paragraph shall be determined without regard to community property laws.

(5) Coordination with exclusion for employer contributions

No deduction shall be allowed under this section for any amount paid for any taxable year to an Archer MSA of an individual if—

(A) any amount is contributed to any Archer MSA of such individual for such year which is excludable from gross income under section 106(b), or

(B) if such individual's spouse is covered under the high deductible health plan covering such individual, any amount is contributed for such year to any Archer MSA of such spouse which is so excludable.

(6) Denial of deduction to dependents

No deduction shall be allowed under this section to any individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which such individual's taxable year begins.

(7) Medicare eligible individuals

The limitation under this subsection for any month with respect to an individual shall be zero for the first month such individual is entitled to benefits under title XVIII of the Social Security Act and for each month thereafter.

(c) Definitions

For purposes of this section—

(1) Eligible individual

(A) In general

The term "eligible individual" means, with respect to any month, any individual if—

(i) such individual is covered under a high deductible health plan as of the 1st day of such month,

(ii) such individual is not, while covered under a high deductible health plan, covered under any health plan—

(I) which is not a high deductible health plan, and

(II) which provides coverage for any benefit which is covered under the high deductible health plan, and

(iii)(I) the high deductible health plan covering such individual is established and maintained by the employer of such individual or of the spouse of such individual and such employer is a small employer, or

(II) such individual is an employee (within the meaning of section 401(c)(1)) or the spouse of such an employee and the high deductible health plan covering such individual is not established or maintained by any employer of such individual or spouse.

(B) Certain coverage disregarded

Subparagraph (A)(ii) shall be applied without regard to—

(i) coverage for any benefit provided by permitted insurance, and

(ii) coverage (whether through insurance or otherwise) for accidents, disability, dental care, vision care, or long-term care.

(C) Continued eligibility of employee and spouse establishing Archer MSAs

If, while an employer is a small employer—

(i) any amount is contributed to an Archer MSA of an individual who is an employee of such employer or the spouse of such an employee, and

(ii) such amount is excludable from gross income under section 106(b) or allowable as a deduction under this section,

such individual shall not cease to meet the requirement of subparagraph (A)(iii)(I) by reason of such employer ceasing to be a small employer so long as such employee continues to be an employee of such employer.

(D) Limitations on eligibility

For limitations on number of taxpayers who are eligible to have Archer MSAs, see subsection (i).

(2) High deductible health plan

(A) In general

The term "high deductible health plan" means a health plan—

(i) in the case of self-only coverage, which has an annual deductible which is not less than $1,500 and not more than $2,250,

(ii) in the case of family coverage, which has an annual deductible which is not less than $3,000 and not more than $4,500, and

(iii) the annual out-of-pocket expenses required to be paid under the plan (other than for premiums) for covered benefits does not exceed—

(I) $3,000 for self-only coverage, and

(II) $5,500 for family coverage.

(B) Special rules

(i) Exclusion of certain plans

Such term does not include a health plan if substantially all of its coverage is coverage described in paragraph (1)(B).

(ii) Safe harbor for absence of preventive care deductible

A plan shall not fail to be treated as a high deductible health plan by reason of failing to have a deductible for preventive care if the absence of a deductible for such care is required by State law.

(3) Permitted insurance

The term "permitted insurance" means—

(A) insurance if substantially all of the coverage provided under such insurance relates to—

(i) liabilities incurred under workers' compensation laws,

(ii) tort liabilities,

(iii) liabilities relating to ownership or use of property, or

(iv) such other similar liabilities as the Secretary may specify by regulations,

(B) insurance for a specified disease or illness, and

(C) insurance paying a fixed amount per day (or other period) of hospitalization.

(4) Small employer

(A) In general

The term "small employer" means, with respect to any calendar year, any employer if such employer employed an average of 50 or fewer employees on business days during either of the 2 preceding calendar years. For purposes of the preceding sentence, a preceding calendar year may be taken into account only if the employer was in existence throughout such year.

(B) Employers not in existence in preceding year

In the case of an employer which was not in existence throughout the 1st preceding calendar year, the determination under subparagraph (A) shall be based on the average number of employees that it is reasonably expected such employer will employ on business days in the current calendar year.

(C) Certain growing employers retain treatment as small employer

The term "small employer" includes, with respect to any calendar year, any employer if—

(i) such employer met the requirement of subparagraph (A) (determined without regard to subparagraph (B)) for any preceding calendar year after 1996,

(ii) any amount was contributed to the Archer MSA of any employee of such employer with respect to coverage of such employee under a high deductible health plan of such employer during such preceding calendar year and such amount was excludable from gross income under section 106(b) or allowable as a deduction under this section, and

(iii) such employer employed an average of 200 or fewer employees on business days during each preceding calendar year after 1996.

(D) Special rules

(i) Controlled groups

For purposes of this paragraph, all persons treated as a single employer under subsection (b), (c), (m), or (o) of section 414 shall be treated as 1 employer.

(ii) Predecessors

Any reference in this paragraph to an employer shall include a reference to any predecessor of such employer.

(5) Family coverage

The term "family coverage" means any coverage other than self-only coverage.

(d) Archer MSA

For purposes of this section—

(1) Archer MSA

The term "Archer MSA" means a trust created or organized in the United States as a medical savings account exclusively for the purpose of paying the qualified medical expenses of the account holder, but only if the written governing instrument creating the trust meets the following requirements:

(A) Except in the case of a rollover contribution described in subsection (f)(5), no contribution will be accepted—

(i) unless it is in cash, or

(ii) to the extent such contribution, when added to previous contributions to the trust for the calendar year, exceeds 75 percent of the highest annual limit deductible permitted under subsection (c)(2)(A)(ii) for such calendar year.

(B) The trustee is a bank (as defined in section 408(n)), an insurance company (as defined in section 816), or another person who demonstrates to the satisfaction of the Secretary that the manner in which such person will administer the trust will be consistent with the requirements of this section.

(C) No part of the trust assets will be invested in life insurance contracts.

(D) The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund.

(E) The interest of an individual in the balance in his account is nonforfeitable.

(2) Qualified medical expenses

(A) In general

The term "qualified medical expenses" means, with respect to an account holder, amounts paid by such holder for medical care (as defined in section 213(d)) for such individual, the spouse of such individual, and any dependent (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) of such individual, but only to the extent such amounts are not compensated for by insurance or otherwise. For purposes of this subparagraph, amounts paid for menstrual care products (as defined in section 223(d)(2)(D)) shall be treated as paid for medical care.

(B) Health insurance may not be purchased from account

(i) In general

Subparagraph (A) shall not apply to any payment for insurance.

(ii) Exceptions

Clause (i) shall not apply to any expense for coverage under—

(I) a health plan during any period of continuation coverage required under any Federal law,

(II) a qualified long-term care insurance contract (as defined in section 7702B(b)), or

(III) a health plan during a period in which the individual is receiving unemployment compensation under any Federal or State law.

(C) Medical expenses of individuals who are not eligible individuals

Subparagraph (A) shall apply to an amount paid by an account holder for medical care of an individual who is not described in clauses (i) and (ii) of subsection (c)(1)(A) for the month in which the expense for such care is incurred only if no amount is contributed (other than a rollover contribution) to any Archer MSA of such account holder for the taxable year which includes such month. This subparagraph shall not apply to any expense for coverage described in subclause (I) or (III) of subparagraph (B)(ii).

(3) Account holder

The term "account holder" means the individual on whose behalf the Archer MSA was established.

(4) Certain rules to apply

Rules similar to the following rules shall apply for purposes of this section:

(A) Section 219(d)(2) (relating to no deduction for rollovers).

(B) Section 219(f)(3) (relating to time when contributions deemed made).

(C) Except as provided in section 106(b), section 219(f)(5) (relating to employer payments).

(D) Section 408(g) (relating to community property laws).

(E) Section 408(h) (relating to custodial accounts).

(e) Tax treatment of accounts

(1) In general

An Archer MSA is exempt from taxation under this subtitle unless such account has ceased to be an Archer MSA. Notwithstanding the preceding sentence, any such account is subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable, etc. organizations).

(2) Account terminations

Rules similar to the rules of paragraphs (2) and (4) of section 408(e) shall apply to Archer MSAs, and any amount treated as distributed under such rules shall be treated as not used to pay qualified medical expenses.

(f) Tax treatment of distributions

(1) Amounts used for qualified medical expenses

Any amount paid or distributed out of an Archer MSA which is used exclusively to pay qualified medical expenses of any account holder shall not be includible in gross income.

(2) Inclusion of amounts not used for qualified medical expenses

Any amount paid or distributed out of an Archer MSA which is not used exclusively to pay the qualified medical expenses of the account holder shall be included in the gross income of such holder.

(3) Excess contributions returned before due date of return

(A) In general

If any excess contribution is contributed for a taxable year to any Archer MSA of an individual, paragraph (2) shall not apply to distributions from the Archer MSAs of such individual (to the extent such distributions do not exceed the aggregate excess contributions to all such accounts of such individual for such year) if—

(i) such distribution is received by the individual on or before the last day prescribed by law (including extensions of time) for filing such individual's return for such taxable year, and

(ii) such distribution is accompanied by the amount of net income attributable to such excess contribution.

Any net income described in clause (ii) shall be included in the gross income of the individual for the taxable year in which it is received.

(B) Excess contribution

For purposes of subparagraph (A), the term "excess contribution" means any contribution (other than a rollover contribution) which is neither excludable from gross income under section 106(b) nor deductible under this section.

(4) Additional tax on distributions not used for qualified medical expenses

(A) In general

The tax imposed by this chapter on the account holder for any taxable year in which there is a payment or distribution from an Archer MSA of such holder which is includible in gross income under paragraph (2) shall be increased by 20 percent of the amount which is so includible.

(B) Exception for disability or death

Subparagraph (A) shall not apply if the payment or distribution is made after the account holder becomes disabled within the meaning of section 72(m)(7) or dies.

(C) Exception for distributions after medicare eligibility

Subparagraph (A) shall not apply to any payment or distribution after the date on which the account holder attains the age specified in section 1811 of the Social Security Act.

(5) Rollover contribution

An amount is described in this paragraph as a rollover contribution if it meets the requirements of subparagraphs (A) and (B).

(A) In general

Paragraph (2) shall not apply to any amount paid or distributed from an Archer MSA to the account holder to the extent the amount received is paid into an Archer MSA or a health savings account (as defined in section 223(d)) for the benefit of such holder not later than the 60th day after the day on which the holder receives the payment or distribution.

(B) Limitation

This paragraph shall not apply to any amount described in subparagraph (A) received by an individual from an Archer MSA if, at any time during the 1-year period ending on the day of such receipt, such individual received any other amount described in subparagraph (A) from an Archer MSA which was not includible in the individual's gross income because of the application of this paragraph.

(6) Coordination with medical expense deduction

For purposes of determining the amount of the deduction under section 213, any payment or distribution out of an Archer MSA for qualified medical expenses shall not be treated as an expense paid for medical care.

(7) Transfer of account incident to divorce

The transfer of an individual's interest in an Archer MSA to an individual's spouse or former spouse under a divorce or separation instrument described in clause (i) of section 121(d)(3)(C) shall not be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest shall, after such transfer, be treated as an Archer MSA with respect to which such spouse is the account holder.

(8) Treatment after death of account holder

(A) Treatment if designated beneficiary is spouse

If the account holder's surviving spouse acquires such holder's interest in an Archer MSA by reason of being the designated beneficiary of such account at the death of the account holder, such Archer MSA shall be treated as if the spouse were the account holder.

(B) Other cases

(i) In general

If, by reason of the death of the account holder, any person acquires the account holder's interest in an Archer MSA in a case to which subparagraph (A) does not apply—

(I) such account shall cease to be an Archer MSA as of the date of death, and

(II) an amount equal to the fair market value of the assets in such account on such date shall be includible if such person is not the estate of such holder, in such person's gross income for the taxable year which includes such date, or if such person is the estate of such holder, in such holder's gross income for the last taxable year of such holder.

(ii) Special rules

(I) Reduction of inclusion for pre-death expenses

The amount includible in gross income under clause (i) by any person (other than the estate) shall be reduced by the amount of qualified medical expenses which were incurred by the decedent before the date of the decedent's death and paid by such person within 1 year after such date.

(II) Deduction for estate taxes

An appropriate deduction shall be allowed under section 691(c) to any person (other than the decedent or the decedent's spouse) with respect to amounts included in gross income under clause (i) by such person.

(g) Cost-of-living adjustment

In the case of any taxable year beginning in a calendar year after 1998, each dollar amount in subsection (c)(2) shall be increased by an amount equal to—

(1) such dollar amount, multiplied by

(2) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which such taxable year begins by substituting "calendar year 1997" for "calendar year 2016" in subparagraph (A)(ii) thereof.

If any increase under the preceding sentence is not a multiple of $50, such increase shall be rounded to the nearest multiple of $50.

(h) Reports

The Secretary may require the trustee of an Archer MSA to make such reports regarding such account to the Secretary and to the account holder with respect to contributions, distributions, and such other matters as the Secretary determines appropriate. The reports required by this subsection shall be filed at such time and in such manner and furnished to such individuals at such time and in such manner as may be required by the Secretary.

(i) Limitation on number of taxpayers having Archer MSAs

(1) In general

Except as provided in paragraph (5), no individual shall be treated as an eligible individual for any taxable year beginning after the cut-off year unless—

(A) such individual was an active MSA participant for any taxable year ending on or before the close of the cut-off year, or

(B) such individual first became an active MSA participant for a taxable year ending after the cut-off year by reason of coverage under a high deductible health plan of an MSA-participating employer.

(2) Cut-off year

For purposes of paragraph (1), the term "cut-off year" means the earlier of—

(A) calendar year 2007, or

(B) the first calendar year before 2007 for which the Secretary determines under subsection (j) that the numerical limitation for such year has been exceeded.

(3) Active MSA participant

For purposes of this subsection—

(A) In general

The term "active MSA participant" means, with respect to any taxable year, any individual who is the account holder of any Archer MSA into which any contribution was made which was excludable from gross income under section 106(b), or allowable as a deduction under this section, for such taxable year.

(B) Special rule for cut-off years before 2007

In the case of a cut-off year before 2007—

(i) an individual shall not be treated as an eligible individual for any month of such year or an active MSA participant under paragraph (1)(A) unless such individual is, on or before the cut-off date, covered under a high deductible health plan, and

(ii) an employer shall not be treated as an MSA-participating employer unless the employer, on or before the cut-off date, offered coverage under a high deductible health plan to any employee.

(C) Cut-off date

For purposes of subparagraph (B)—

(i) In general

Except as otherwise provided in this subparagraph, the cut-off date is October 1 of the cut-off year.

(ii) Employees with enrollment periods after October 1

In the case of an individual described in subclause (I) of subsection (c)(1)(A)(iii), if the regularly scheduled enrollment period for health plans of the individual's employer occurs during the last 3 months of the cut-off year, the cut-off date is December 31 of the cut-off year.

(iii) Self-employed individuals

In the case of an individual described in subclause (II) of subsection (c)(1)(A)(iii), the cut-off date is November 1 of the cut-off year.

(iv) Special rules for 1997

If 1997 is a cut-off year by reason of subsection (j)(1)(A)—

(I) each of the cut-off dates under clauses (i) and (iii) shall be 1 month earlier than the date determined without regard to this clause, and

(II) clause (ii) shall be applied by substituting "4 months" for "3 months".

(4) MSA-participating employer

For purposes of this subsection, the term "MSA-participating employer" means any small employer if—

(A) such employer made any contribution to the Archer MSA of any employee during the cut-off year or any preceding calendar year which was excludable from gross income under section 106(b), or

(B) at least 20 percent of the employees of such employer who are eligible individuals for any month of the cut-off year by reason of coverage under a high deductible health plan of such employer each made a contribution of at least $100 to their Archer MSAs for any taxable year ending with or within the cut-off year which was allowable as a deduction under this section.

(5) Additional eligibility after cut-off year

If the Secretary determines under subsection (j)(2)(A) that the numerical limit for the calendar year following a cut-off year described in paragraph (2)(B) has not been exceeded—

(A) this subsection shall not apply to any otherwise eligible individual who is covered under a high deductible health plan during the first 6 months of the second calendar year following the cut-off year (and such individual shall be treated as an active MSA participant for purposes of this subsection if a contribution is made to any Archer MSA with respect to such coverage), and

(B) any employer who offers coverage under a high deductible health plan to any employee during such 6-month period shall be treated as an MSA-participating employer for purposes of this subsection if the requirements of paragraph (4) are met with respect to such coverage.

For purposes of this paragraph, subsection (j)(2)(A) shall be applied for 1998 by substituting "750,000" for "600,000".

(j) Determination of whether numerical limits are exceeded

(1) Determination of whether limit exceeded for 1997

The numerical limitation for 1997 is exceeded if, based on the reports required under paragraph (4), the number of Archer MSAs established as of—

(A) April 30, 1997, exceeds 375,000, or

(B) June 30, 1997, exceeds 525,000.

(2) Determination of whether limit exceeded for 1998, 1999, 2001, 2002, 2004, 2005, or 2006

(A) In general

The numerical limitation for 1998, 1999, 2001, 2002, 2004, 2005, or 2006 is exceeded if the sum of—

(i) the number of MSA returns filed on or before April 15 of such calendar year for taxable years ending with or within the preceding calendar year, plus

(ii) the Secretary's estimate (determined on the basis of the returns described in clause (i)) of the number of MSA returns for such taxable years which will be filed after such date,

exceeds 750,000 (600,000 in the case of 1998). For purposes of the preceding sentence, the term "MSA return" means any return on which any exclusion is claimed under section 106(b) or any deduction is claimed under this section.

(B) Alternative computation of limitation

The numerical limitation for 1998, 1999, 2001, 2002, 2004, 2005, or 2006 is also exceeded if the sum of—

(i) 90 percent of the sum determined under subparagraph (A) for such calendar year, plus

(ii) the product of 2.5 and the number of Archer MSAs established during the portion of such year preceding July 1 (based on the reports required under paragraph (4)) for taxable years beginning in such year,

exceeds 750,000.

(C) No limitation for 2000 or 2003

The numerical limitation shall not apply for 2000 or 2003.

(3) Previously uninsured individuals not included in determination

(A) In general

The determination of whether any calendar year is a cut-off year shall be made by not counting the Archer MSA of any previously uninsured individual.

(B) Previously uninsured individual

For purposes of this subsection, the term "previously uninsured individual" means, with respect to any Archer MSA, any individual who had no health plan coverage (other than coverage referred to in subsection (c)(1)(B)) at any time during the 6-month period before the date such individual's coverage under the high deductible health plan commences.

(4) Reporting by MSA trustees

(A) In general

Not later than August 1 of 1997, 1998, 1999, 2001, 2002, 2004, 2005, and 2006, each person who is the trustee of an Archer MSA established before July 1 of such calendar year shall make a report to the Secretary (in such form and manner as the Secretary shall specify) which specifies—

(i) the number of Archer MSAs established before such July 1 (for taxable years beginning in such calendar year) of which such person is the trustee,

(ii) the name and TIN of the account holder of each such account, and

(iii) the number of such accounts which are accounts of previously uninsured individuals.

(B) Additional report for 1997

Not later than June 1, 1997, each person who is the trustee of an Archer MSA established before May 1, 1997, shall make an additional report described in subparagraph (A) but only with respect to accounts established before May 1, 1997.

(C) Penalty for failure to file report

The penalty provided in section 6693(a) shall apply to any report required by this paragraph, except that—

(i) such section shall be applied by substituting "$25" for "$50", and

(ii) the maximum penalty imposed on any trustee shall not exceed $5,000.

(D) Aggregation of accounts

To the extent practicable, in determining the number of Archer MSAs on the basis of the reports under this paragraph, all Archer MSAs of an individual shall be treated as 1 account and all accounts of individuals who are married to each other shall be treated as 1 account.

(5) Date of making determinations

Any determination under this subsection that a calendar year is a cut-off year shall be made by the Secretary and shall be published not later than October 1 of such year.

(Added Pub. L. 104–191, title III, §301(a), Aug. 21, 1996, 110 Stat. 2037; amended Pub. L. 105–33, title IV, §4006(b)(2), Aug. 5, 1997, 111 Stat. 333; Pub. L. 105–34, title XVI, §1602(a)(2), (3), Aug. 5, 1997, 111 Stat. 1093, 1094; Pub. L. 106–554, §1(a)(7) [title II, §§201(a), (b), 202(a)(4), (b)(2)(B), (3)–(8), (10), (11)], Dec. 21, 2000, 114 Stat. 2763, 2763A–628, 2763A–629; Pub. L. 107–147, title VI, §612(a), (b), Mar. 9, 2002, 116 Stat. 61; Pub. L. 108–173, title XII, §1201(c), Dec. 8, 2003, 117 Stat. 2476; Pub. L. 108–311, title II, §207(19), title III, §322(a), (b), Oct. 4, 2004, 118 Stat. 1178, 1183; Pub. L. 109–432, div. A, title I, §117(a), (b), Dec. 20, 2006, 120 Stat. 2941; Pub. L. 111–148, title IX, §§9003(b), 9004(b), Mar. 23, 2010, 124 Stat. 854; Pub. L. 115–97, title I, §§11002(d)(1)(T), 11051(b)(3)(D), Dec. 22, 2017, 131 Stat. 2060, 2090; Pub. L. 116–136, div. A, title III, §3702(b), Mar. 27, 2020, 134 Stat. 416.)

Inflation Adjusted Items for Certain Years

For inflation adjustment of certain items in this section, see Revenue Procedures listed in a table under section 1 of this title.

Editorial Notes

References in Text

The Social Security Act, referred to in subsecs. (b)(7) and (f)(4)(C), is act Aug. 14, 1935, ch. 531, 49 Stat. 620. Title XVIII of the Act is classified generally to subchapter XVIII (§1395 et seq.) of chapter 7 of Title 42, The Public Health and Welfare. Section 1811 of the Act is classified to section 1395c of Title 42. For complete classification of this Act to the Code, see section 1305 of Title 42 and Tables.

Prior Provisions

A prior section 220 was renumbered 224 of this title.

Another prior section 220, added Pub. L. 100–647, title VI, §6007(a), Nov. 10, 1988, 102 Stat. 3687, related to jury duty pay remitted to employer, prior to repeal by Pub. L. 101–508, title XI, §11802(e)(2), Nov. 5, 1990, 104 Stat. 1388–530.

Another prior section 220, added Pub. L. 94–455, title XV, §1501(a), Oct. 4, 1976, 90 Stat. 1734; amended Pub. L. 95–600, title I, §§156(c)(3), 157(a)(2), (b)(2), title VII, §703(c)(2), (3), Nov. 6, 1978, 92 Stat. 2803, 2804, 2939; Pub. L. 96–222, title I, §101(a)(14)(B), Apr. 1, 1980, 94 Stat. 204, related to retirement savings for certain married individuals, prior to repeal by Pub. L. 97–34, title III, §311(e), Aug. 13, 1981, 95 Stat. 280, applicable to taxable years beginning after Dec. 31, 1981, and deductions allowed under section 220 of this title, as in effect prior to its repeal, treated as deductions under section 219 of this title.

Amendments

2020—Subsec. (d)(2)(A). Pub. L. 116–136 substituted "For purposes of this subparagraph, amounts paid for menstrual care products (as defined in section 223(d)(2)(D)) shall be treated as paid for medical care." for "Such term shall include an amount paid for medicine or a drug only if such medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin."

2017—Subsec. (f)(7). Pub. L. 115–97, §11051(b)(3)(D), substituted "clause (i) of section 121(d)(3)(C)" for "subparagraph (A) of section 71(b)(2)".

Subsec. (g)(2). Pub. L. 115–97, §11002(d)(1)(T), substituted "for 'calendar year 2016' in subparagraph (A)(ii)" for "for 'calendar year 1992' in subparagraph (B)".

2010—Subsec. (d)(2)(A). Pub. L. 111–148, §9003(b), inserted at end "Such term shall include an amount paid for medicine or a drug only if such medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin."

Subsec. (f)(4)(A). Pub. L. 111–148, §9004(b), substituted "20 percent" for "15 percent".

2006—Subsec. (i)(2), (3)(B). Pub. L. 109–432, §117(a), substituted "2007" for "2005" wherever appearing in headings and text.

Subsec. (j)(2). Pub. L. 109–432, §117(b)(1), substituted "2004, 2005, or 2006" for "or 2004" in heading and in introductory provisions of subpars. (A) and (B).

Subsec. (j)(4)(A). Pub. L. 109–432, §117(b)(2), substituted "2004, 2005, and 2006" for "and 2004" in introductory provisions.

2004—Subsec. (d)(2)(A). Pub. L. 108–311, §207(19), inserted ", determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof" after "section 152".

Subsec. (i)(2), (3)(B). Pub. L. 108–311, §322(a), substituted "2005" for "2003" wherever appearing in headings and text.

Subsec. (j)(2). Pub. L. 108–311, §322(b)(1)(B), substituted "2002, or 2004" for "or 2002" in heading.

Subsec. (j)(2)(A), (B). Pub. L. 108–311, §322(b)(1)(A), substituted "2002, or 2004" for "or 2002" in introductory provisions.

Subsec. (j)(2)(C). Pub. L. 108–311, §322(b)(3), amended heading and text of subpar. (C) generally. Prior to amendment text read as follows: "The numerical limitation shall not apply for 2000."

Subsec. (j)(4)(A). Pub. L. 108–311, §322(b)(2), substituted "2002, and 2004" for "and 2002" in introductory provisions.

2003—Subsec. (f)(5)(A). Pub. L. 108–173 inserted "or a health savings account (as defined in section 223(d))" after "paid into an Archer MSA".

2002—Subsec. (i)(2). Pub. L. 107–147, §612(a), substituted "2003" for "2002" in subpars. (A) and (B).

Subsec. (i)(3)(B). Pub. L. 107–147, §612(a), substituted "2003" for "2002" in heading and introductory provisions.

Subsec. (j)(2). Pub. L. 107–147, §612(b)(1), substituted "1998, 1999, 2001, or 2002" for "1998, 1999, or 2001" wherever appearing in heading and text.

Subsec. (j)(4)(A). Pub. L. 107–147, §612(b)(2), substituted "2001, and 2002" for "and 2001".

2000—Pub. L. 106–554, §1(a)(7) [title II, §202(b)(8)], substituted "Archer MSAs" for "Medical savings accounts" in section catchline.

Subsecs. (a), (b)(5). Pub. L. 106–554, §1(a)(7) [title II, §202(b)(10)], substituted "an Archer MSA" for "a Archer MSA".

Pub. L. 106–554, §1(a)(7) [title II, §202(a)(4)], substituted "Archer MSA" for "medical savings account" wherever appearing.

Subsec. (c)(1)(C). Pub. L. 106–554, §1(a)(7) [title II, §202(b)(7)], substituted "Archer MSAs" for "medical savings accounts" in heading.

Subsec. (c)(1)(C)(i). Pub. L. 106–554, §1(a)(7) [title II, §202(b)(10)], substituted "an Archer MSA" for "a Archer MSA".

Pub. L. 106–554, §1(a)(7) [title II, §202(a)(4)], substituted "Archer MSA" for "medical savings account".

Subsec. (c)(1)(D). Pub. L. 106–554, §1(a)(7) [title II, §202(b)(2)(B)], substituted "Archer MSAs" for "medical savings accounts".

Subsec. (c)(4)(C)(ii). Pub. L. 106–554, §1(a)(7) [title II, §202(a)(4)], substituted "Archer MSA" for "medical savings account".

Subsec. (d). Pub. L. 106–554, §1(a)(7) [title II, §202(b)(4)], substituted "Archer MSA" for "Medical savings account" in heading.

Subsec. (d)(1). Pub. L. 106–554, §1(a)(7) [title II, §202(b)(5)], substituted "Archer MSA" for "Medical savings account" in heading.

Pub. L. 106–554, §1(a)(7) [title II, §202(a)(4), (b)(3)], in introductory provisions, substituted "Archer MSA" for "medical savings account" and inserted "as a medical savings account" after "United States".

Subsec. (d)(2)(C), (3). Pub. L. 106–554, §1(a)(7) [title II, §202(a)(4)], substituted "Archer MSA" for "medical savings account".

Subsec. (e)(1). Pub. L. 106–554, §1(a)(7) [title II, §202(b)(10), (11)], substituted "An Archer MSA is exempt" for "A Archer MSA is exempt" and "ceased to be an Archer MSA" for "ceased to be a Archer MSA".

Pub. L. 106–554, §1(a)(7) [title II, §202(a)(4)], substituted "Archer MSA" for "medical savings account" in two places.

Subsec. (e)(2). Pub. L. 106–554, §1(a)(7) [title II, §202(b)(2)(B)], substituted "Archer MSAs" for "medical savings accounts".

Subsec. (f). Pub. L. 106–554, §1(a)(7) [title II, §202(b)(10)], substituted "an Archer MSA" for "a Archer MSA" wherever appearing.

Pub. L. 106–554, §1(a)(7) [title II, §202(a)(4), (b)(2)(B)], substituted "Archer MSA" for "medical savings account" wherever appearing and "Archer MSAs" for "medical savings accounts" in introductory provisions of par. (3)(A).

Subsec. (h). Pub. L. 106–554, §1(a)(7) [title II, §202(b)(10)], substituted "an Archer MSA" for "a Archer MSA".

Pub. L. 106–554, §1(a)(7) [title II, §202(a)(4)], substituted "Archer MSA" for "medical savings account".

Subsec. (i). Pub. L. 106–554, §1(a)(7) [title II, §202(b)(6)], substituted "Archer MSAs" for "medical savings accounts" in heading.

Subsec. (i)(2)(A), (B). Pub. L. 106–554, §1(a)(7) [title II, §201(a)], substituted "2002" for "2000".

Subsec. (i)(3)(A). Pub. L. 106–554, §1(a)(7) [title II, §202(a)(4)], substituted "Archer MSA" for "medical savings account".

Subsec. (i)(3)(B). Pub. L. 106–554, §1(a)(7) [title II, §201(a)], substituted "2002" for "2000" in heading and introductory provisions.

Subsec. (i)(4)(A). Pub. L. 106–554, §1(a)(7) [title II, §202(a)(4)], substituted "Archer MSA" for "medical savings account".

Subsec. (i)(4)(B). Pub. L. 106–554, §1(a)(7) [title II, §202(b)(2)(B)], substituted "Archer MSAs" for "medical savings accounts".

Subsec. (i)(5)(A). Pub. L. 106–554, §1(a)(7) [title II, §202(a)(4)], substituted "Archer MSA" for "medical savings account".

Subsec. (j)(1). Pub. L. 106–554, §1(a)(7) [title II, §202(b)(2)(B)], substituted "Archer MSAs" for "medical savings accounts" in introductory provisions.

Subsec. (j)(2). Pub. L. 106–554, §1(a)(7) [title II, §201(b)(1)(A)], substituted "1998, 1999, or 2001" for "1998 or 1999" in heading and in introductory provisions of subpars. (A) and (B).

Subsec. (j)(2)(A). Pub. L. 106–554, §1(a)(7) [title II, §201(b)(1)(B)], substituted "750,000 (600,000 in the case of 1998)" for "600,000 (750,000 in the case of 1999)" in concluding provisions.

Subsec. (j)(2)(B)(ii). Pub. L. 106–554, §1(a)(7) [title II, §202(b)(2)(B)], substituted "Archer MSAs" for "medical savings accounts".

Subsec. (j)(2)(C). Pub. L. 106–554, §1(a)(7) [title II, §201(b)(1)(C)], added subpar. (C).

Subsec. (j)(3)(A), (B). Pub. L. 106–554, §1(a)(7) [title II, §202(a)(4)], substituted "Archer MSA" for "medical savings account".

Subsec. (j)(4)(A). Pub. L. 106–554, §1(a)(7) [title II, §202(b)(10)], substituted "an Archer MSA" for "a Archer MSA" in introductory provisions.

Pub. L. 106–554, §1(a)(7) [title II, §§201(b)(2), 202(a)(4)], in introductory provisions, substituted "1999, and 2001" for "and 1999" and "Archer MSA" for "medical savings account".

Subsec. (j)(4)(A)(i). Pub. L. 106–554, §1(a)(7) [title II, §202(b)(2)(B)], substituted "Archer MSAs" for "medical savings accounts".

Subsec. (j)(4)(B). Pub. L. 106–554, §1(a)(7) [title II, §202(b)(10)], substituted "an Archer MSA" for "a Archer MSA".

Pub. L. 106–554, §1(a)(7) [title II, §202(a)(4)], substituted "Archer MSA" for "medical savings account".

Subsec. (j)(4)(D). Pub. L. 106–554, §1(a)(7) [title II, §202(b)(2)(B)], substituted "Archer MSAs" for "medical savings accounts" in two places.

1997—Subsec. (b)(7). Pub. L. 105–33 added par. (7).

Subsec. (c)(3). Pub. L. 105–34, §1602(a)(2), redesignated subpars. (B) to (D) as (A) to (C), respectively, and struck out former subpar. (A) which read as follows: "Medicare supplemental insurance,".

Subsec. (d)(2)(C). Pub. L. 105–34, §1602(a)(3), substituted "described in clauses (i) and (ii) of subsection (c)(1)(A)" for "an eligible individual".

Statutory Notes and Related Subsidiaries

Effective Date of 2020 Amendment

Pub. L. 116–136, div. A, title III, §3702(d)(1), Mar. 27, 2020, 134 Stat. 416, provided that: "The amendment made by subsections (a) and (b) [amending this section and section 223 of this title] shall apply to amounts paid after December 31, 2019."

Effective Date of 2017 Amendment

Amendment by section 11002(d)(1)(T) of Pub. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, see section 11002(e) of Pub. L. 115–97, set out as a note under section 1 of this title.

Amendment by section 11051(b)(3)(D) of Pub. L. 115–97 applicable to any divorce or separation instrument (as defined in former section 71(b)(2) of this title as in effect before Dec. 22, 2017) executed after Dec. 31, 2018, and to such instruments executed on or before Dec. 31, 2018, and modified after Dec. 31, 2018, if the modification expressly provides that the amendment made by section 11051 of Pub. L. 115–97 applies to such modification, see section 11051(c) of Pub. L. 115–97, set out as a note under section 61 of this title.

Effective Date of 2010 Amendment

Pub. L. 111–148, title IX, §9003(d)(1), Mar. 23, 2010, 124 Stat. 854, provided that: "The amendments made by subsections (a) and (b) [amending this section and section 223 of this title] shall apply to amounts paid with respect to taxable years beginning after December 31, 2010."

Pub. L. 111–148, title IX, §9004(c), Mar. 23, 2010, 124 Stat. 854, provided that: "The amendments made by this section [amending this section and section 223 of this title] shall apply to distributions made after December 31, 2010."

Effective Date of 2004 Amendment

Amendment by section 207(19) of Pub. L. 108–311 applicable to taxable years beginning after Dec. 31, 2004, see section 208 of Pub. L. 108–311, set out as a note under section 2 of this title.

Pub. L. 108–311, title III, §322(c), Oct. 4, 2004, 118 Stat. 1183, provided that: "The amendments made by this section [amending this section] shall take effect on January 1, 2004."

Effective Date of 2003 Amendment

Amendment by Pub. L. 108–173 applicable to taxable years beginning after Dec. 31, 2003, see section 1201(k) of Pub. L. 108–173, set out as a note under section 62 of this title.

Effective Date of 2002 Amendment

Pub. L. 107–147, title VI, §612(c), Mar. 9, 2002, 116 Stat. 61, provided that: "The amendments made by this section [amending this section] shall take effect on January 1, 2002."

Effective Date of 2000 Amendment

Pub. L. 106–554, §1(a)(7) [title II, §201(c)], Dec. 21, 2000, 114 Stat. 2763, 2763A–628, provided that: "The amendments made by this section [amending this section] shall take effect on the date of the enactment of this Act [Dec. 21, 2000]."

Effective Date of 1997 Amendments

Amendment by Pub. L. 105–34 effective as if included in the provisions of the Health Insurance Portability and Accountability Act of 1996, Pub. L. 104–191, to which such amendment relates, see section 1602(i) of Pub. L. 105–34, set out as a note under section 26 of this title.

Amendment by Pub. L. 105–33 applicable to taxable years beginning after Dec. 31, 1998, see section 4006(c) of Pub. L. 105–33, set out as an Effective Date note under section 138 of this title.

Effective Date

Section applicable to taxable years beginning after Dec. 31, 1996, see section 301(j) of Pub. L. 104–191, set out as an Effective Date of 1996 Amendment note under section 62 of this title.

Time for Filing Reports, Etc.

Pub. L. 109–432, div. A, title I, §117(c), Dec. 20, 2006, 120 Stat. 2942, provided that:

"(1) The report required by section 220(j)(4) of the Internal Revenue Code of 1986 to be made on August 1, 2005, or August 1, 2006, as the case may be, shall be treated as timely if made before the close of the 90-day period beginning on the date of the enactment of this Act [Dec. 20, 2006].

"(2) The determination and publication required by section 220(j)(5) of such Code with respect to calendar year 2005 or calendar year 2006, as the case may be, shall be treated as timely if made before the close of the 120-day period beginning on the date of the enactment of this Act. If the determination under the preceding sentence is that 2005 or 2006 is a cut-off year under section 220(i) of such Code, the cut-off date under such section 220(i) shall be the last day of such 120-day period."

Pub. L. 108–311, title III, §322(d), Oct. 4, 2004, 118 Stat. 1183, provided that:

"(1) The report required by section 220(j)(4) of the Internal Revenue Code of 1986 to be made on August 1, 2004, shall be treated as timely if made before the close of the 90-day period beginning on the date of the enactment of this Act [Oct. 4, 2004].

"(2) The determination and publication required by section 220(j)(5) of such Code with respect to calendar year 2004 shall be treated as timely if made before the close of the 120-day period beginning on the date of the enactment of this Act. If the determination under the preceding sentence is that 2004 is a cut-off year under section 220(i) of such Code, the cut-off date under such section 220(i) shall be the last day of such 120-day period."

Monitoring of Participation in Medical Savings Accounts

Pub. L. 104–191, title III, §301(k), Aug. 21, 1996, 110 Stat. 2052, provided that: "The Secretary of the Treasury or his delegate shall—

"(1) during 1997, 1998, 1999, and 2000, regularly evaluate the number of individuals who are maintaining medical savings accounts and the reduction in revenues to the United States by reason of such accounts, and

"(2) provide such reports of such evaluations to Congress as such Secretary determines appropriate."

Study of Effects of Medical Savings Accounts on Small Group Market

Pub. L. 104–191, title III, §301(l), Aug. 21, 1996, 110 Stat. 2052, mandated a comprehensive study regarding the effects of medical savings accounts in the small group market on selection, health costs, preventive care, consumer choice, high deductible plans, and other relevant issues, and mandated a report to Congress on the results of the study by Jan. 1, 1999.
26 U.S.C. § 907 (2024) — Title 26: INTERNAL REVENUE CODE / Chapter 1 / Section 907: Special rules in case of foreign oil and gas income
Special rules in case of foreign oil and gas income
Status: in_force

(a) Reduction in amount allowed as foreign tax under section 901

In applying section 901, the amount of any foreign oil and gas taxes paid or accrued (or deemed to have been paid) during the taxable year which would (but for this subsection) be taken into account for purposes of section 901 shall be reduced by the amount (if any) by which the amount of such taxes exceeds the product of—

(1) the amount of the combined foreign oil and gas income for the taxable year,

(2) multiplied by—

(A) in the case of a corporation, the percentage which is equal to the highest rate of tax specified under section 11(b), or

(B) in the case of an individual, a fraction the numerator of which is the tax against which the credit under section 901(a) is taken and the denominator of which is the taxpayer's entire taxable income.

(b) Combined foreign oil and gas income; foreign oil and gas taxes

For purposes of this section—

(1) Combined foreign oil and gas income

The term "combined foreign oil and gas income" means, with respect to any taxable year, the sum of—

(A) foreign oil and gas extraction income, and

(B) foreign oil related income.

(2) Foreign oil and gas taxes

The term "foreign oil and gas taxes" means, with respect to any taxable year, the sum of—

(A) oil and gas extraction taxes, and

(B) any income, war profits, and excess profits taxes paid or accrued (or deemed to have been paid or accrued under section 960) during the taxable year with respect to foreign oil related income (determined without regard to subsection (c)(4)) or loss which would be taken into account for purposes of section 901 without regard to this section.

(c) Foreign income definitions and special rules

For purposes of this section—

(1) Foreign oil and gas extraction income

The term "foreign oil and gas extraction income" means the taxable income derived from sources without the United States and its possessions from—

(A) the extraction (by the taxpayer or any other person) of minerals from oil or gas wells, or

(B) the sale or exchange of assets used by the taxpayer in the trade or business described in subparagraph (A).

Such term does not include any dividend or interest income which is passive income (as defined in section 904(d)(2)(A)).

(2) Foreign oil related income

The term "foreign oil related income" means the taxable income derived from sources outside the United States and its possessions from—

(A) the processing of minerals extracted (by the taxpayer or by any other person) from oil or gas wells into their primary products,

(B) the transportation of such minerals or primary products,

(C) the distribution or sale of such minerals or primary products,

(D) the disposition of assets used by the taxpayer in the trade or business described in subparagraph (A), (B), or (C), or

(E) the performance of any other related service.

Such term does not include any dividend or interest income which is passive income (as defined in section 904(d)(2)(A)).

(3) Dividends, interest, partnership distribution, etc.

The term "foreign oil and gas extraction income" and the term "foreign oil related income" include—

(A) interest, to the extent the category of income of such interest is determined under section 904(d)(3),

(B) amounts with respect to which taxes are deemed paid under section 960, and

(C) the taxpayer's distributive share of the income of partnerships,

to the extent such dividends, interest, amounts, or distributive share is attributable to foreign oil and gas extraction income, or to foreign oil related income, as the case may be; except that interest described in subparagraph (A) shall not be taken into account in computing foreign oil and gas extraction income but shall be taken into account in computing foreign oil-related income.

(4) Recapture of foreign oil and gas losses by recharacterizing later combined foreign oil and gas income

(A) In general

The combined foreign oil and gas income of a taxpayer for a taxable year (determined without regard to this paragraph) shall be reduced—

(i) first by the amount determined under subparagraph (B), and

(ii) then by the amount determined under subparagraph (C).

The aggregate amount of such reductions shall be treated as income (from sources without the United States) which is not combined foreign oil and gas income.

(B) Reduction for pre-2009 foreign oil extraction losses

The reduction under this paragraph shall be equal to the lesser of—

(i) the foreign oil and gas extraction income of the taxpayer for the taxable year (determined without regard to this paragraph), or

(ii) the excess of—

(I) the aggregate amount of foreign oil extraction losses for preceding taxable years beginning after December 31, 1982, and before January 1, 2009, over

(II) so much of such aggregate amount as was recharacterized under this paragraph (as in effect before and after the date of the enactment of the Energy Improvement and Extension Act of 2008) for preceding taxable years beginning after December 31, 1982.

(C) Reduction for post-2008 foreign oil and gas losses

The reduction under this paragraph shall be equal to the lesser of—

(i) the combined foreign oil and gas income of the taxpayer for the taxable year (determined without regard to this paragraph), reduced by an amount equal to the reduction under subparagraph (A) for the taxable year, or

(ii) the excess of—

(I) the aggregate amount of foreign oil and gas losses for preceding taxable years beginning after December 31, 2008, over

(II) so much of such aggregate amount as was recharacterized under this paragraph for preceding taxable years beginning after December 31, 2008.

(D) Foreign oil and gas loss defined

(i) In general

For purposes of this paragraph, the term "foreign oil and gas loss" means the amount by which—

(I) the gross income for the taxable year from sources without the United States and its possessions (whether or not the taxpayer chooses the benefits of this subpart for such taxable year) taken into account in determining the combined foreign oil and gas income for such year, is exceeded by

(II) the sum of the deductions properly apportioned or allocated thereto.

(ii) Net operating loss deduction not taken into account

For purposes of clause (i), the net operating loss deduction allowable for the taxable year under section 172(a) shall not be taken into account.

(iii) Expropriation and casualty losses not taken into account

For purposes of clause (i), there shall not be taken into account—

(I) any foreign expropriation loss (as defined in section 172(h) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990)) for the taxable year, or

(II) any loss for the taxable year which arises from fire, storm, shipwreck, or other casualty, or from theft,

 to the extent such loss is not compensated for by insurance or otherwise.

(iv) Foreign oil extraction loss

For purposes of subparagraph (B)(ii)(I), foreign oil extraction losses shall be determined under this paragraph as in effect on the day before the date of the enactment of the Energy Improvement and Extension Act of 2008.

(5) Oil and gas extraction taxes

The term "oil and gas extraction taxes" means any income, war profits, and excess profits tax paid or accrued (or deemed to have been paid under section 960) during the taxable year with respect to foreign oil and gas extraction income (determined without regard to paragraph (4)) or loss which would be taken into account for purposes of section 901 without regard to this section.

(d) Disregard of certain posted prices, etc.

For purposes of this chapter, in determining the amount of taxable income in the case of foreign oil and gas extraction income, if the oil or gas is disposed of, or is acquired other than from the government of a foreign country, at a posted price (or other pricing arrangement) which differs from the fair market value for such oil or gas, such fair market value shall be used in lieu of such posted price (or other pricing arrangement).

[(e) Repealed. Pub. L. 101–508, title XI, §11801(a)(32), Nov. 5, 1990, 104 Stat. 1388–521]

(f) Carryback and carryover of disallowed credits

(1) In general

If the amount of the foreign oil and gas taxes paid or accrued during any taxable year exceeds the limitation provided by subsection (a) for such taxable year (hereinafter in this subsection referred to as the "unused credit year"), such excess shall be deemed to be foreign oil and gas taxes paid or accrued in the first preceding taxable year and in any of the first 10 succeeding taxable years, in that order and to the extent not deemed tax paid or accrued in a prior taxable year by reason of the limitation imposed by paragraph (2). Such amount deemed paid or accrued in any taxable year may be availed of only as a tax credit and not as a deduction and only if the taxpayer for such year chooses to have the benefits of this subpart as to taxes paid or accrued for that year to foreign countries or possessions.

(2) Limitation

The amount of the unused foreign oil and gas taxes which under paragraph (1) may be deemed paid or accrued in any preceding or succeeding taxable year shall not exceed the lesser of—

(A) the amount by which the limitation provided by subsection (a) for such taxable year exceeds the sum of—

(i) the foreign oil and gas taxes paid or accrued during such taxable year, plus

(ii) the amounts of the foreign oil and gas taxes which by reason of this subsection are deemed paid or accrued in such taxable year and are attributable to taxable years preceding the unused credit year; or

(B) the amount by which the limitation provided by section 904 for such taxable year exceeds the sum of—

(i) the taxes paid or accrued (or deemed to have been paid under section 960) to all foreign countries and possessions of the United States during such taxable year,

(ii) the amount of such taxes which were deemed paid or accrued in such taxable year under section 904(c) and which are attributable to taxable years preceding the unused credit year, plus

(iii) the amount of the foreign oil and gas taxes which by reason of this subsection are deemed paid or accrued in such taxable year and are attributable to taxable years preceding the unused credit year.

(3) Special rules

(A) In the case of any taxable year which is an unused credit year under this subsection and which is an unused credit year under section 904(c), the provisions of this subsection shall be applied before section 904(c).

(B) For purposes of determining the amount of taxes paid or accrued in any taxable year which may be deemed paid or accrued in a preceding or succeeding taxable year under section 904(c), any tax deemed paid or accrued in such preceding or succeeding taxable year under this subsection shall be considered to be tax paid or accrued in such preceding or succeeding taxable year.

(4) Transition rules for pre-2009 and 2009 disallowed credits

(A) Pre-2009 credits

In the case of any unused credit year beginning before January 1, 2009, this subsection, as in effect on the day before the date of the enactment of the Energy Improvement and Extension Act of 2008, shall apply to unused oil and gas extraction taxes carried from such unused credit year to a taxable year beginning after December 31, 2008.

(B) 2009 credits

In the case of any unused credit year beginning in 2009, the amendments made to this subsection by the Energy Improvement and Extension Act of 2008 shall be treated as being in effect for any preceding year beginning before January 1, 2009, solely for purposes of determining how much of the unused foreign oil and gas taxes for such unused credit year may be deemed paid or accrued in such preceding year.

(Added Pub. L. 94–12, title VI, §601(a), Mar. 29, 1975, 89 Stat. 54; amended Pub. L. 94–455, title X, §§1031(b)(6), 1032(b), 1035(a), (b), (d)(1), (2), 1052(c)(4), Oct. 4, 1976, 90 Stat. 1623, 1626, 1630–1632, 1648; Pub. L. 95–600, title III, §301(b)(14), title VII, §701(u)(8)(A), (B), Nov. 6, 1978, 92 Stat. 2822, 2916; Pub. L. 97–248, title II, §211(a)–(c)(1), (d), Sept. 3, 1982, 96 Stat. 448–450; Pub. L. 100–647, title I, §1012(g)(6), Nov. 10, 1988, 102 Stat. 3501; Pub. L. 101–508, title XI, §11801(a)(32), Nov. 5, 1990, 104 Stat. 1388–521; Pub. L. 103–66, title XIII, §13235(a)(1), Aug. 10, 1993, 107 Stat. 504; Pub. L. 104–188, title I, §1704(t)(36), Aug. 20, 1996, 110 Stat. 1889; Pub. L. 108–357, title IV, §417(b), Oct. 22, 2004, 118 Stat. 1512; Pub. L. 110–343, div. B, title IV, §402(a)–(c), Oct. 3, 2008, 122 Stat. 3852, 3854; Pub. L. 113–295, div. A, title II, §210(e), Dec. 19, 2014, 128 Stat. 4031; Pub. L. 115–97, title I, §14301(c)(24)–(27), Dec. 22, 2017, 131 Stat. 2223, 2224; Pub. L. 115–141, div. U, title IV, §401(a)(158), (159), Mar. 23, 2018, 132 Stat. 1191.)

Editorial Notes

References in Text

The date of the enactment of the Energy Improvement and Extension Act of 2008, referred to in subsecs. (c)(4)(B)(ii)(II), (D)(iv) and (f)(4)(A), is the date of enactment of div. B of Pub. L. 110–343, which was approved Oct. 3, 2008.

Section 172(h), referred to in subsec. (c)(4)(D)(iii)(I), was repealed by Pub. L. 101–508, title XI, §11811(b)(1), Nov. 5, 1990, 104 Stat. 1388–532.

The date of the enactment of the Revenue Reconciliation Act of 1990, referred to in subsec. (c)(4)(D)(iii)(I), is the date of enactment of Pub. L. 101–508, title XI, which was approved Nov. 5, 1990.

The Energy Improvement and Extension Act of 2008, referred to in subsec. (f)(4)(B), is div. B of Pub. L. 110–343, Oct. 3, 2008, 122 Stat. 3807. For the amendments made to subsec. (f) of this section by the Act, see 2008 Amendment notes below.

Amendments

2018—Subsec. (c)(3)(C). Pub. L. 115–141, §401(a)(158), substituted comma for period at end.

Subsec. (f)(1). Pub. L. 115–141, §401(a)(159), substituted "years," for "year,".

2017—Subsec. (b)(2)(B). Pub. L. 115–97, §14301(c)(24), struck out "902 or" after "under section".

Subsec. (c)(3)(A). Pub. L. 115–97, §14301(c)(25)(A), added subpar. (A) and struck out former subpar. (A) which read as follows: "dividends and interest from a foreign corporation in respect of which taxes are deemed paid by the taxpayer under section 902,".

Subsec. (c)(3)(B). Pub. L. 115–97, §14301(c)(25)(B), substituted "section 960" for "section 960(a)".

Subsec. (c)(5). Pub. L. 115–97, §14301(c)(26), struck out "902 or" after "under section".

Subsec. (f)(2)(B)(i). Pub. L. 115–97, §14301(c)(27), struck out "902 or" after "under section".

2014—Subsec. (f)(4)(A). Pub. L. 113–295 substituted "this subsection, as in effect on the day before the date of the enactment of the Energy Improvement and Extension Act of 2008, shall apply to unused oil and gas extraction taxes carried from such unused credit year to a taxable year beginning after December 31, 2008." for "this subsection shall be applied to any unused oil and gas extraction taxes carried from such unused credit year to a year beginning after December 31, 2008—

"(i) by substituting 'oil and gas extraction taxes' for 'foreign oil and gas taxes' each place it appears in paragraphs (1), (2), and (3), and

"(ii) by computing, for purposes of paragraph (2)(A), the limitation under subparagraph (A) for the year to which such taxes are carried by substituting 'foreign oil and gas extraction income' for 'foreign oil and gas income' in subsection (a)."

2008—Subsecs. (a), (b). Pub. L. 110–343, §402(a), amended subsecs. (a) and (b) generally. Prior to amendment, subsec. (a) related to reduction in amount of oil and gas extraction taxes paid or accrued for purposes of section 901 and subsec. (b) excepted certain amounts of foreign oil related income taxes paid or accrued to any foreign country from the definition of "income, war profits, and excess profits taxes".

Subsec. (c)(4). Pub. L. 110–343, §402(b), amended par. (4) generally. Prior to amendment, par. (4) provided for recapture of foreign oil and gas extraction losses by recharacterizing later extraction income.

Subsec. (f). Pub. L. 110–343, §402(c)(1), substituted "foreign oil and gas taxes" for "oil and gas extraction taxes" wherever appearing.

Subsec. (f)(4). Pub. L. 110–343, §402(c)(2), added par. (4).

2004—Subsec. (f)(1). Pub. L. 108–357, §417(b)(3), struck out at end "For purposes of this subsection, the terms 'second preceding taxable year', and 'first preceding taxable year' do not include any taxable year ending before January 1, 1975."

Pub. L. 108–357, §417(b)(2), substituted "and in any of the first 10" for ", and in the first, second, third, fourth, or fifth".

Pub. L. 108–357, §417(b)(1), struck out "in the second preceding taxable year," before "in the first preceding taxable year".

1996—Subsec. (c)(4)(B)(iii)(I). Pub. L. 104–188 inserted "(as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990)" after "section 172(h)".

1993—Subsec. (c)(1), (2). Pub. L. 103–66 inserted concluding provisions.

1990—Subsec. (e). Pub. L. 101–508, §11801(a)(32), struck out subsec. (e) which read as follows:

"(1) Credits arising in taxable years beginning before january 1, 1983.—The amount of taxes paid or accrued in any taxable year beginning before January 1, 1983 (hereinafter in this paragraph referred to as the 'excess credit year') which under section 904(c) or 907(f) may be deemed paid or accrued in a taxable year beginning after December 31, 1982, shall not exceed the amount which could have been deemed paid or accrued if sections 907(b), 907(f), and 904(f)(4) (as in effect on the day before the date of the enactment of the Tax Equity and Fiscal Responsibility Act of 1982) remained in effect for taxable years beginning after December 31, 1982.

"(2) Carryback of credits arising in taxable years beginning after december 31, 1982.—The amount of the taxes paid or accrued in a taxable year beginning after December 31, 1982, which may be deemed paid or accrued under section 904(c) or 907(f) in a taxable year beginning before January 1, 1983, shall not exceed the amount which could have been deemed paid or accrued if sections 907(b), 907(f), and 904(f)(4) (as in effect on the day before the date of the enactment of the Tax Equity and Fiscal Responsibility Act of 1982) remained in effect for taxable years beginning after December 31, 1982."

Subsec. (f)(3)(C). Pub. L. 101–508, §11801(a)(32), struck out subpar. (C) which read as follows: "For purposes of determining the amount of the unused oil and gas extraction taxes which under paragraph (1) may be deemed paid or accrued in any taxable year ending before January 1, 1977, subparagraph (A) of paragraph (2) shall be applied as if the amendment made by section 1035(a) of the Tax Reform Act of 1976 applied to such taxable year."

1988—Subsec. (c)(3). Pub. L. 100–647, §1012(g)(6)(B), struck out "and dividends described in subparagraph (B)" after "described in subparagraph (A)" in closing provisions.

Subsec. (c)(3)(B) to (D). Pub. L. 100–647, §1012(g)(6)(A), redesignated subpars. (C) and (D) as (B) and (C), respectively, and struck out former subpar. (B) which read as follows: "dividends from a domestic corporation which are treated under section 861(a)(2)(A) as income from sources without the United States,".

1982—Subsec. (b). Pub. L. 97–248, §211(c)(1), added subsec. (b). Former subsec. (b), which had provided that section 904 be applied separately with respect to foreign oil related income and other taxable income, was struck out.

Subsec. (c)(2). Pub. L. 97–248, §211(b), in subpar. (A) substituted "the processing of minerals extracted (by the taxpayer or by any other person) from oil or gas wells into their primary products" for "the extraction (by the taxpayer or any other person) of minerals from oil or gas wells", deleted subpar. (B) which had provided that foreign oil related income meant the taxable income derived from sources outside the United States and its possessions from the processing of minerals from oil or gas wells into their primary products, redesignated subpar. (C) as (B), redesignated subpar. (D) as (C) and in subpar. (C) as so redesignated struck out "or" at the end, redesignated subpar. (E) as (D) and in subpar. (D) as so redesignated substituted "disposition" for "sale or exchange", and "or (C), or" for "(C), or (D)", struck out the period at the end, and added subpar. (E).

Subsec. (c)(4). Pub. L. 97–248, §211(a), substituted provisions regarding the recapture of foreign oil and gas extraction losses by recharacterization of later extraction income for provisions that if, for any foreign country for any taxable year, the taxpayer would have had a net operating loss if only items from sources within such country (including deductions properly apportioned or allocated thereto) which related to the extraction of minerals from oil or gas wells had been taken into account, such items would not be taken into account in computing foreign oil and gas extraction income for such year, but would be taken into account in computing foreign oil related income for such year.

Subsec. (e). Pub. L. 97–248, §211(d)(1), substituted rules regarding credits arising in taxable years beginning before Jan. 1, 1983, for rules regarding taxable years ending after Dec. 31, 1974, in par. (1), and in par. (2) substituted rules regarding carryback of credits arising in taxable years beginning after Dec. 31, 1982, for rules regarding taxable years ending after Dec. 31, 1975.

Subsec. (f)(1). Pub. L. 97–248, §211(d)(2)(A), substituted "such excess" for "so much of such excess as does not exceed 2 percent of foreign oil and gas extraction income for such taxable year" in first sentence, and struck out former provision that had directed that the above substitution be made regarding taxes deemed paid or accrued in any taxable year which ended in 1975, 1976, or 1977.

Subsec. (f)(2)(B). Pub. L. 97–248, §211(d)(2)(B)(i), substituted "provided by section 904 for such taxable year" for "provided by section 904 on taxes paid or accrued with respect to foreign oil-related income for such taxable year" in the introductory provisions, and in cl. (i) substituted "the United States during such taxable year" for "the United States with respect to such income during such taxable year".

Subsec. (f)(3)(A). Pub. L. 97–248, §211(d)(2)(B)(ii), substituted "section 904(c)" for "section 904(c) with respect to oil-related income".

Subsec. (f)(3)(B). Pub. L. 97–248, §211(d)(2)(B)(iii), struck out "oil-related" after "determining the amount of".

1978—Subsec. (a)(2). Pub. L. 95–600, §§301(b)(14), 701(u)(8)(A), designated existing provisions as subpar. (A), inserted applicability to corporations and generally reworked applicable formula, and added subpar. (B).

Subsec. (b). Pub. L. 95–600, §701(u)(8)(B), substituted provisions relating to applicability of section 904 separately to foreign oil related income and other taxable income for provisions relating to applicability of section 904 to corporations and other taxpayers.

1976—Subsec. (a). Pub. L. 94–455, §1035(a), substituted "oil and gas extraction taxes" for "income, war profits, and excess profits taxes" after "the amount of any" and, in par. (2), substituted "the percentage which is the sum of the normal tax rate and the surtax rate for the taxable year specified in section 11" for provisions giving the percentage multiplier for years ending 1975, 1976, and after 1976.

Subsec. (b). Pub. L. 94–455, §§1032(b)(1), 1035(b), inserted provisions making a distinction between corporations and other taxpayers and rules applicable to each and, as amended, struck out provision requiring the overall limitation, rather than the per-country limitation, be applied in the case of a corporation to foreign oil-related income and, a taxpayer other than a corporation, to foreign oil and gas extraction income.

Subsec. (c)(5). Pub. L. 94–455, §1035(d)(2), added par. (5).

Subsec. (e)(1). Pub. L. 94–455, §1031(b)(6)(A), substituted "(d) and (e) of section 904 (as in effect on the day before the date of enactment of the Tax Reform Act of 1976)" for "(d) and (e) of section 904" after "In applying subsections".

Subsec. (e)(2). Pub. L. 94–455, §1031(b)(6), substituted "(d) and (e) of section 904 (as in effect on the day before the date of enactment of the Tax Reform Act of 1976)" for "(d) and (e) of section 904" after "In applying subsections", "section 904(a)(1) (as so in effect)" for "section 904(a)(1)" after "provided by section" and, in subpar. (A), "section 904(e)(2) (as so in effect)" for "section 904(e)(2)" after "sentence of section".

Subsec. (f). Pub. L. 94–455, §§1032(b)(2), 1035(d)(1), added subsec. (f). Former subsec. (f), relating to recapture of foreign oil related loss, was struck out.

Subsec. (g). Pub. L. 94–455, §§1032(b)(2), 1035(d)(1), 1052(c)(4), struck out subsec. (g) relating to Western Hemisphere trade corporations which are members of an affiliated group.

Statutory Notes and Related Subsidiaries

Effective Date of 2017 Amendment

Amendment by Pub. L. 115–97 applicable to taxable years of foreign corporations beginning after Dec. 31, 2017, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end, see section 14301(d) of Pub. L. 115–97, set out as a note under section 78 of this title.

Effective Date of 2014 Amendment

Amendment by Pub. L. 113–295 effective as if included in the provisions of the Energy Improvement and Extension Act of 2008, Pub. L. 110–343, div. B, to which such amendment relates, see section 210(h) of Pub. L. 113–295, set out as a note under section 45 of this title.

Effective Date of 2008 Amendment

Pub. L. 110–343, div. B, title IV, §402(e), Oct. 3, 2008, 122 Stat. 3854, provided that: "The amendments made by this section [amending this section and section 6501 of this title] shall apply to taxable years beginning after December 31, 2008."

Effective Date of 2004 Amendment

Amendment by section 417(b)(1) of Pub. L. 108–357 applicable to excess foreign taxes arising in taxable years beginning after Oct. 22, 2004, and amendment by section 417(b)(2) of Pub. L. 108–357 applicable to excess foreign taxes which may be carried to any taxable year ending after Oct. 22, 2004, see section 417(c) of Pub. L. 108–357, set out as a note under section 904 of this title.

Effective Date of 1993 Amendment

Amendment by Pub. L. 103–66 applicable to taxable years beginning after Dec. 31, 1992, see section 13235(c) of Pub. L. 103–66, set out as a note under section 904 of this title.

Effective Date of 1988 Amendment

Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

Effective Date of 1982 Amendment

Pub. L. 97–248, title II, §211(e), Sept. 3, 1982, 96 Stat. 450, as amended by Pub. L. 97–448, title III, §306(a)(5), 96 Stat. 2401; Pub. L. 98–369, div. A, title VII, §712(e), July 18, 1984, 98 Stat. 947, provided that:

"(1) In general.—Except as provided in paragraph (2), the amendments made by this section [amending this section and section 904 of this title] shall apply to taxable years beginning after December 31, 1982.

"(2) Retention of old sections 907(b) and 904(f)(4) where taxpayer had separate basket foreign loss.—

"(A) In general.—If, after applying old sections 907(b) and 904(f)(4) to a taxable year beginning before January 1, 1983, the taxpayer had a separate basket foreign loss, such loss shall not be recaptured from income of a kind not taken into account in computing the amount of such separate basket foreign loss more rapidly than ratably over the 8-year period (or such shorter period as the taxpayer may select) beginning with the first taxable year beginning after December 31, 1982.

"(B) Definitions.—For purposes of this paragraph—

"(i) The term 'separate basket foreign loss' means any foreign loss attributable to activities taken into account (or not taken into account) in determining foreign oil related income (as defined in old section 907(c)(2)).

"(ii) An 'old' section is such section as in effect on the day before the date of the enactment of this Act [Sept. 3, 1982]."

Effective Date of 1978 Amendment

Amendment by section 301(b)(14) of Pub. L. 95–600 applicable to taxable years beginning after Dec. 31, 1978, see section 301(c) of Pub. L. 95–600, set out as a note under section 11 of this title.

Pub. L. 95–600, title VII, §701(u)(8)(D), Nov. 6, 1978, 92 Stat. 2916, as amended by Pub. L. 99–514, §2, Oct. 22, 1986, 100 Stat. 2095, provided that:

"(i) The amendments made by this paragraph [amending this section and section 904 of this title] shall apply, in the case of individuals, to taxable years ending after December 31, 1974, and, in the case of corporations, to taxable years ending after December 31, 1976.

"(ii) In the case of any taxable year ending after December 31, 1975, with respect to foreign oil related income (within the meaning of section 907(c) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]), the overall limitation provided by section 904(a)(2) of such Code shall apply and the per-country limitation provided by section 904(a)(1) of such Code shall not apply."

Effective Date of 1976 Amendment

Amendment by section 1031(b)(6)(A) of Pub. L. 94–455 applicable to taxable years beginning after Dec. 31, 1975, with exceptions for certain mining operations, income from possessions, and carryback and carryover in the case of mining operations and income from a possession, see section 1031(c) of Pub. L. 94–455, set out as a note under section 904 of this title.

Amendment by section 1032(b)(1) of Pub. L. 94–455 applicable to taxable years beginning after Dec. 31, 1975, and amendment by section 1032(b)(2) of Pub. L. 94–455 applicable to losses sustained in taxable years beginning after Dec. 31, 1975, see section 1032(c) of Pub. L. 94–455, set out as a note under section 904 of this title.

Pub. L. 94–455, title X, §1035(e), Oct. 4, 1976, 90 Stat. 1633, as amended by Pub. L. 99–514, §2, Oct. 22, 1986, 100 Stat. 2095, provided that:

"(1) The amendment made by subsection (a) [amending this section] shall apply to taxable years ending after December 31, 1976.

"(2) The amendment made by subsection (b) [amending this section] shall apply to taxable years ending after December 31, 1974; except that the last sentence of section 907(b) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] shall only apply to taxable years ending after December 31, 1975.

"(3) The amendment made by subsection (c) [enacting provisions set out below] shall apply to taxable years beginning after June 29, 1976.

"(4) The amendments made by subsection (d) [amending this section] shall apply to taxes paid or accrued during taxable years ending after the date of the enactment of this Act [Oct. 4, 1976]."

Amendment by section 1052(c)(4) of Pub. L. 94–455 effective with respect to taxable years beginning after December 31, 1979, see section 1052(d) of Pub. L. 94–455, set out as a note under section 170 of this title.

Effective Date

Pub. L. 94–12, title VI, §601(d), Mar. 29, 1975, 89 Stat. 58, provided that: "The amendments made by this section [enacting this section and amending section 901 of this title] shall apply to taxable years ending after December 31, 1974; except that—

"(1) the second sentence of section 907(b) shall apply to taxable years ending after December 31, 1975, and

"(2) the provisions of section 907(f) shall apply to losses sustained in taxable years ending after December 31, 1975."

Savings Provision

For provisions that nothing in amendment by Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liability for tax for periods ending after Nov. 5, 1990, see section 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title.

Tax Credit for Production-Sharing Contracts

Pub. L. 94–455, title X, §1035(c), Oct. 4, 1976, 90 Stat. 1631, as amended by Pub. L. 95–600, title VII, §§701(u)(9), 703(h)(1), Nov. 6, 1978, 92 Stat. 2916, 2940; Pub. L. 99–514, §2, Oct. 22, 1986, 100 Stat. 2095, provided that:

"(1) For purposes of section 901 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], there shall be treated as income, war profits, and excess profits taxes to be taken into account under section 907(a) of such Code amounts designated as income taxes of a foreign government by such government (which otherwise would not be treated as taxes for purposes of section 901 of such Code) with respect to production-sharing contracts for the extraction of foreign oil or gas.

"(2) The amounts specified in paragraph (1) shall not exceed the lessor of—

"(A) the product of the foreign oil and gas extraction income (as defined in section 907(c) of such Code) with respect to all such production-sharing contracts multiplied by the sum of the normal tax rate and the surtax rate for the taxable year specified in section 11 of such Code, or

"(B) the excess of the total amount of foreign oil and gas extraction income (as so defined) for the taxable year multiplied by the sum of the normal tax rate and the surtax rate for the taxable year specified in section 11 of such Code over the amount of any income, war profits, and excess profits taxes paid or accrued (or deemed to have been paid) without regard to paragraph (1) during the taxable year with respect to foreign oil and gas extraction income.

"(3) The production-sharing contracts taken into account for purposes of paragraph (1) shall be those contracts which were entered into before April 8, 1976, for the sharing of foreign oil and gas production with a foreign government (or an entity owned by such government) with respect to which amounts claimed as taxes paid or accrued to such foreign government for taxable years beginning before June 30, 1976, will not be disallowed as taxes. A contract described in the preceding sentence shall be taken into account under paragraph (1) only with respect to amounts (A) paid or accrued to the foreign government before January 1, 1978, and (B) attributable to income earned before such date."
26 U.S.C. § 1233 (2024) — Title 26: INTERNAL REVENUE CODE / Chapter 1 / Section 1233: Gains and losses from short sales
Gains and losses from short sales
Status: in_force

(a) Capital assets

For purposes of this subtitle, gain or loss from the short sale of property shall be considered as gain or loss from the sale or exchange of a capital asset to the extent that the property, including a commodity future, used to close the short sale constitutes a capital asset in the hands of the taxpayer.

(b) Short-term gains and holding periods

If gain or loss from a short sale is considered as gain or loss from the sale or exchange of a capital asset under subsection (a) and if on the date of such short sale substantially identical property has been held by the taxpayer for not more than 1 year (determined without regard to the effect, under paragraph (2) of this subsection, of such short sale on the holding period), or if substantially identical property is acquired by the taxpayer after such short sale and on or before the date of the closing thereof—

(1) any gain on the closing of such short sale shall be considered as a gain on the sale or exchange of a capital asset held for not more than 1 year (notwithstanding the period of time any property used to close such short sale has been held); and

(2) the holding period of such substantially identical property shall be considered to begin (notwithstanding section 1223, relating to the holding period of property) on the date of the closing of the short sale, or on the date of a sale, gift, or other disposition of such property, whichever date occurs first. This paragraph shall apply to such substantially identical property in the order of the dates of the acquisition of such property, but only to so much of such property as does not exceed the quantity sold short.

For purposes of this subsection, the acquisition of an option to sell property at a fixed price shall be considered as a short sale, and the exercise or failure to exercise such option shall be considered as a closing of such short sale.

(c) Certain options to sell

Subsection (b) shall not include an option to sell property at a fixed price acquired on the same day on which the property identified as intended to be used in exercising such option is acquired and which, if exercised, is exercised through the sale of the property so identified. If the option is not exercised, the cost of the option shall be added to the basis of the property with which the option is identified. This subsection shall apply only to options acquired after August 16, 1954.

(d) Long-term losses

If on the date of such short sale substantially identical property has been held by the taxpayer for more than 1 year, any loss on the closing of such short sale shall be considered as a loss on the sale or exchange of a capital asset held for more than 1 year (notwithstanding the period of time any property used to close such short sale has been held, and notwithstanding section 1234).

(e) Rules for application of section

(1) Subsection (b)(1) or (d) shall not apply to the gain or loss, respectively, on any quantity of property used to close such short sale which is in excess of the quantity of the substantially identical property referred to in the applicable subsection.

(2) For purposes of subsections (b) and (d)—

(A) the term "property" includes only stocks and securities (including stocks and securities dealt with on a "when issued" basis), and commodity futures, which are capital assets in the hands of the taxpayer, but does not include any position to which section 1092(b) applies;

(B) in the case of futures transactions in any commodity on or subject to the rules of a board of trade or commodity exchange, a commodity future requiring delivery in 1 calendar month shall not be considered as property substantially identical to another commodity future requiring delivery in a different calendar month;

(C) in the case of a short sale of property by an individual, the term "taxpayer", in the application of this subsection and subsections (b) and (d), shall be read as "taxpayer or his spouse"; but an individual who is legally separated from the taxpayer under a decree of divorce or of separate maintenance shall not be considered as the spouse of the taxpayer;

(D) a securities futures contract (as defined in section 1234B) to acquire substantially identical property shall be treated as substantially identical property; and

(E) entering into a securities futures contract (as so defined) to sell shall be considered to be a short sale, and the settlement of such contract shall be considered to be the closing of such short sale.

(3) Where the taxpayer enters into 2 commodity futures transactions on the same day, one requiring delivery by him in one market and the other requiring delivery to him of the same (or substantially identical) commodity in the same calendar month in a different market, and the taxpayer subsequently closes both such transactions on the same day, subsections (b) and (d) shall have no application to so much of the commodity involved in either such transaction as does not exceed in quantity the commodity involved in the other.

(4)(A) In the case of a taxpayer who is a dealer in securities (within the meaning of section 1236)—

(i) if, on the date of a short sale of stock, substantially identical property which is a capital asset in the hands of the taxpayer has been held for not more than 1 year, and

(ii) if such short sale is closed more than 20 days after the date on which it was made,

subsection (b)(2) shall apply in respect of the holding period of such substantially identical property.

(B) For purposes of subparagraph (A)—

(i) the last sentence of subsection (b) applies; and

(ii) the term "stock" means any share or certificate of stock in a corporation, any bond or other evidence of indebtedness which is convertible into any such share or certificate, or any evidence of an interest in, or right to subscribe to or purchase, any of the foregoing.

(f) Arbitrage operations in securities

In the case of a short sale which had been entered into as an arbitrage operation, to which sale the rule of subsection (b)(2) would apply except as otherwise provided in this subsection—

(1) subsection (b)(2) shall apply first to substantially identical assets acquired for arbitrage operations held at the close of business on the day such sale is made, and only to the extent that the quantity sold short exceeds the substantially identical assets acquired for arbitrage operations held at the close of business on the day such sale is made, shall the holding period of any other such identical assets held by the taxpayer be affected;

(2) in the event that assets acquired for arbitrage operations are disposed of in such manner as to create a net short position in assets acquired for arbitrage operations, such net short position shall be deemed to constitute a short sale made on that day;

(3) for the purpose of paragraphs (1) and (2) of this subsection the taxpayer will be deemed as of the close of any business day to hold property which he is or will be entitled to receive or acquire by virtue of any other asset acquired for arbitrage operations or by virtue of any contract he has entered into in an arbitrage operation; and

(4) for the purpose of this subsection arbitrage operations are transactions involving the purchase and sale of assets for the purpose of profiting from a current difference between the price of the asset purchased and the price of the asset sold, and in which the asset purchased, if not identical to the asset sold, is such that by virtue thereof the taxpayer is, or will be, entitled to acquire assets identical to the assets sold. Such operations must be clearly identified by the taxpayer in his records as arbitrage operations on the day of the transaction or as soon thereafter as may be practicable. Assets acquired for arbitrage operations will include stocks and securities and the right to acquire stocks and securities.

(g) Hedging transactions

This section shall not apply in the case of a hedging transaction in commodity futures.

(h) Short sales of property which becomes substantially worthless

(1) In general

If—

(A) the taxpayer enters into a short sale of property, and

(B) such property becomes substantially worthless,

the taxpayer shall recognize gain in the same manner as if the short sale were closed when the property becomes substantially worthless. To the extent provided in regulations prescribed by the Secretary, the preceding sentence also shall apply with respect to any option with respect to property, any offsetting notional principal contract with respect to property, any futures or forward contract to deliver any property, and any other similar transaction.

(2) Statute of limitations

If property becomes substantially worthless during a taxable year and any short sale of such property remains open at the time such property becomes substantially worthless, then—

(A) the statutory period for the assessment of any deficiency attributable to any part of the gain on such transaction shall not expire before the earlier of—

(i) the date which is 3 years after the date the Secretary is notified by the taxpayer (in such manner as the Secretary may by regulations prescribe) of the substantial worthlessness of such property, or

(ii) the date which is 6 years after the date the return for such taxable year is filed, and

(B) such deficiency may be assessed before the date applicable under subparagraph (A) notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.

(Aug. 16, 1954, ch. 736, 68A Stat. 327; Aug. 12, 1955, ch. 871, §1, 69 Stat. 717; Pub. L. 85–866, title I, §52(a), (b), Sept. 2, 1958, 72 Stat. 1643, 1644; Pub. L. 94–455, title XIV, §1402(b)(1)(T), (2), title XIX, §1901(a)(137), Oct. 4, 1976, 90 Stat. 1732, 1787; Pub. L. 97–34, title V, §501(c), Aug. 13, 1981, 95 Stat. 326; Pub. L. 98–369, div. A, title X, §1001(b)(17), (e), July 18, 1984, 98 Stat. 1012; Pub. L. 105–34, title X, §1003(b)(1), Aug. 5, 1997, 111 Stat. 910; Pub. L. 106–554, §1(a)(7) [title IV, §401(f)], Dec. 21, 2000, 114 Stat. 2763, 2763A–649; Pub. L. 107–147, title IV, §412(d)(3)(A), Mar. 9, 2002, 116 Stat. 54.)

Editorial Notes

Amendments

2002—Subsec. (e)(2)(E). Pub. L. 107–147 added subpar. (E).

2000—Subsec. (e)(2)(D). Pub. L. 106–554 added subpar. (D).

1997—Subsec. (h). Pub. L. 105–34 added subsec. (h).

1984—Subsecs. (b), (d), (e)(4)(A)(i). Pub. L. 98–369 substituted "6 months" for "1 year" wherever appearing, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below.

1981—Subsec. (e)(2)(A). Pub. L. 97–34 inserted ", but does not include any position to which section 1092(b) applies" after "taxpayer".

1976—Subsec. (b). Pub. L. 94–455, §1402(b)(2), provided that "9 months" would be changed to "1 year".

Pub. L. 94–455, §1402(b)(1)(T), (2), provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977.

Subsec. (c). Pub. L. 94–455, §1901(a)(137), substituted "August 16, 1954" for "the date of enactment of this title".

Subsecs. (d), (e)(4)(A)(i). Pub. L. 94–455, §1402(b)(2), provided that "9 months" would be changed to "1 year".

Pub. L. 94–455, §1402(b)(1)(T), provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977.

1958—Subsec. (a). Pub. L. 85–866, §52(b), struck out ", other than a hedging transaction in commodity futures," after "sale of property".

Subsec. (e)(4). Pub. L. 85–866, §52(a), added par. (4).

Subsec. (g). Pub. L. 85–866, §52(b), added subsec. (g).

1955—Subsec. (f). Act Aug. 12, 1955, added subsec. (f).

Statutory Notes and Related Subsidiaries

Effective Date of 2002 Amendment

Amendment by Pub. L. 107–147 effective as if included in the provisions of the Community Renewal Tax Relief Act of 2000 [H.R. 5662, as enacted by Pub. L. 106–554], to which such amendment relates, see section 412(e) of Pub. L. 107–147, set out as a note under section 151 of this title.

Effective Date of 1997 Amendment

Pub. L. 105–34, title X, §1003(b)(2), Aug. 5, 1997, 111 Stat. 910, provided that: "The amendment made by paragraph (1) [amending this section] shall apply to property which becomes substantially worthless after the date of the enactment of this Act [Aug. 5, 1997]."

Effective Date of 1984 Amendment

Amendment by Pub. L. 98–369 applicable to property acquired after June 22, 1984, and before Jan. 1, 1988, see section 1001(e) of Pub. L. 98–369, set out as a note under section 166 of this title.

Effective Date of 1981 Amendment

Amendment by Pub. L. 97–34 applicable to property acquired and positions established by the taxpayer after June 23, 1981, in taxable years ending after such date, and applicable when so elected with respect to property held on June 23, 1981, see section 508 of Pub. L. 97–34, set out as an Effective Date note under section 1092 of this title.

Effective Date of 1976 Amendment

Pub. L. 94–455, title XIV, §1402(b)(1), Oct. 4, 1976, 90 Stat. 1731, provided that the amendment made by that section is effective with respect to taxable years beginning in 1977.

Pub. L. 94–455, title XIV, §1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, provided that the amendment made by that section is effective with respect to taxable years beginning after Dec. 31, 1977.

Amendment by section 1901(a)(137) of Pub. L. 94–455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title.

Effective Date of 1958 Amendment

Amendment by section 52(b) of Pub. L. 85–866 applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1(c)(1) of Pub. L. 85–866, set out as a note under section 165 of this title.

Pub. L. 85–866, title I, §52(c), Sept. 2, 1958, 72 Stat. 1644, provided that: "The amendment made by subsection (a) [amending this section] shall apply with respect to short sales made after December 31, 1957."

Effective Date of 1955 Amendment

Act Aug. 12, 1955, ch. 871, §2, 69 Stat. 718, provided that: "The amendment made by the first section of this Act [amending this section] shall apply only with respect to taxable years ending after the date of the enactment of this Act [Aug. 12, 1955] and only in the case of a short sale of property made by the taxpayer after such date."