Title 26, Internal Revenue CodeRelease 119-110
§860 Deduction for Deficiency Dividends
Title 26 › Subtitle A — Income Taxes › CHAPTER 1 — NORMAL TAXES AND SURTAXES › Subchapter M — Regulated Investment Companies and Real Estate Investment Trusts › PART III — PROVISIONS WHICH APPLY TO BOTH REGULATED INVESTMENT COMPANIES AND REAL ESTATE INVESTMENT TRUSTS › § 860
Summary
Allows a mutual fund or a real estate investment trust (REIT) to take a special tax deduction for certain distributions called "deficiency dividends" when a final tax decision raises its taxable income for a past year. A "qualified investment entity" means a regulated investment company (mutual fund) or a REIT. A "determination" means a final court decision, a closing agreement, a signed agreement with the IRS under rules, or a taxpayer’s statement amending a return. "Deficiency dividends" are distributions of property made after that determination but within 90 days, and only if a claim for the deduction is filed. The deduction is used to figure the entity’s dividends-paid tax deduction for the year affected. The law limits how much can be claimed, with separate caps for ordinary dividends and for capital gain dividends. Such deficiency dividends cannot be counted as dividends paid for the year they are paid or for the prior year for certain calculations. The claim for the deduction must be filed within 120 days after the determination. For interest, penalties, and collection rules, the IRS treats the tax as if it were increased by the amount of the deduction, treats the original tax-payment due date as the payment date for that increase, and treats the increase as paid when the claim is filed. If the deduction creates an overpayment, refund rules act as if two years remained to file a refund claim. Filing the claim pauses the two-year assessment period and stays collection for certain times: collection is stayed for 120 days after the determination, and if a claim is filed the part of the tax reduced by the deduction is not collected until the claim is denied. No deduction is allowed if the determination finds fraud or willful failure to file.
Full Legal Text
Title 26, §860
Internal Revenue Code, Source: USLM XML via OLRC
(a)General rule
If a determination with respect to any qualified investment entity results in any adjustment for any taxable year, a deduction shall be allowed to such entity for the amount of deficiency dividends for purposes of determining the deduction for dividends paid (for purposes of section 852 or 857, whichever applies) for such year.
(b)Qualified investment entity defined
For purposes of this section, the term “qualified investment entity” means—
(1)a regulated investment company, and
(2)a real estate investment trust.
(c)Rules for application of section (d) Adjustment
(1)Interest and additions to tax determined with respect to the amount of deficiency dividend deduction allowed
For purposes of determining interest, additions to tax, and additional amounts—
(A)the tax imposed by this chapter (after taking into account the deduction allowed by subsection (a)) on the qualified investment entity for the taxable year with respect to which the determination is made shall be deemed to be increased by an amount equal to the deduction allowed by subsection (a) with respect to such taxable year,
(B)the last date prescribed for payment of such increase in tax shall be deemed to have been the last date prescribed for the payment of tax (determined in the manner provided by section 6601(b)) for the taxable year with respect to which the determination is made, and
(C)such increase in tax shall be deemed to be paid as of the date the claim for the deficiency dividend deduction is filed.
(2)Credit or refund
If the allowance of a deficiency dividend deduction results in an overpayment of tax for any taxable year, credit or refund with respect to such overpayment shall be made as if on the date of the determination 2 years remained before the expiration of the period of limitations on the filing of claim for refund for the taxable year to which the overpayment relates.
(e)Determination
For purposes of this section, the term “determination” means—
(1)a decision by the Tax Court, or a judgment, decree, or other order by any court of competent jurisdiction, which has become final;
(2)a closing agreement made under section 7121;
(3)under regulations prescribed by the Secretary, an agreement signed by the Secretary and by, or on behalf of, the qualified investment entity relating to the liability of such entity for tax; or
(4)a statement by the taxpayer attached to its amendment or supplement to a return of tax for the relevant tax year.
(f)Deficiency dividends
(1)Definition
For purposes of this section, the term “deficiency dividends” means a distribution of property made by the qualified investment entity on or after the date of the determination and before filing claim under subsection (g), which would have been includible in the computation of the deduction for dividends paid under section 561 for the taxable year with respect to which the liability for tax resulting from the determination exists if distributed during such taxable year. No distribution of property shall be considered as deficiency dividends for purposes of subsection (a) unless distributed within 90 days after the determination, and unless a claim for a deficiency dividend deduction with respect to such distribution is filed pursuant to subsection (g).
(2)Limitations
(A)Ordinary dividends
The amount of deficiency dividends (other than deficiency dividends qualifying as capital gain dividends) paid by a qualified investment entity for the taxable year with respect to which the liability for tax resulting from the determination exists shall not exceed the sum of— (i)
(ii)the amount of decrease referred to in subparagraph (C) of paragraph (1) or (2) of subsection (d) (whichever applies).
(B)Capital gain dividends
The amount of deficiency dividends qualifying as capital gain dividends paid by a qualified investment entity for the taxable year with respect to which the liability for tax resulting from the determination exists shall not exceed the amount by which (i) the increase referred to in subparagraph (B) of paragraph (1) or (2) of subsection (d) (whichever applies), exceeds (ii) the amount of any dividends paid during such taxable year which are designated or reported (as the case may be) as capital gain dividends after such determination.
(3)Effect on dividends paid deduction
(A)For taxable year in which paid
Deficiency dividends paid in any taxable year shall not be included in the amount of dividends paid for such year for purposes of computing the dividends paid deduction for such year.
(B)For prior taxable year
Deficiency dividends paid in any taxable year shall not be allowed for purposes of section 855(a) or 858(a) in the computation of the dividends paid deduction for the taxable year preceding the taxable year in which paid.
(g)Claim required
No deficiency dividend deduction shall be allowed under subsection (a) unless (under regulations prescribed by the Secretary) claim therefore is filed within 120 days after the date of the determination.
(h)Suspension of statute of limitations and stay of collection
(1)Suspension of running of statute
If the qualified investment entity files a claim as provided in subsection (g), the running of the statute of limitations provided in section 6501 on the making of assessments, and the bringing of distraint or a proceeding in court for collection, in respect of the deficiency established by a determination under this section, and all interest, additions to tax, additional amounts, or assessable penalties in respect thereof, shall be suspended for a period of 2 years after the date of the determination.
(2)Stay of collection
In the case of any deficiency established by a determination under this section— (A)
(B)if claim for a deficiency dividend deduction is filed under subsection (g), the collection of such part of the deficiency as is not reduced by the deduction for deficiency dividends provided in subsection (a) shall be stayed until the date the claim is disallowed (in whole or in part), and if disallowed in part collection shall be made only with respect to the part disallowed.
No distraint or proceeding in court shall be begun for the collection of an amount the collection of which is stayed under subparagraph (A) or (B) during the period for which the collection of such amount is stayed.
(i)Deduction denied in case of fraud
No deficiency dividend deduction shall be allowed under subsection (a) if the determination contains a finding that any part of any deficiency attributable to an adjustment with respect to the taxable year is due to fraud with intent to evade tax or to willful failure to file an income tax return within the time prescribed by law or prescribed by the Secretary in pursuance of law.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
References in Text
section 857(b)(3)(A), referred to in subsec. (d)(2)(B), relating to alternative tax in case of capital gains, was repealed by Pub. L. 115–97, title I, § 13001(b)(2)(K)(i), Dec. 22, 2017, 131 Stat. 2096. Subsec. (b)(3)(B) of section 857, relating to treatment of capital gain dividends by shareholders, was redesignated subsec. (b)(3)(A) of that section.
Prior Provisions
A prior section 860 was renumbered section 859 of this title.
Amendments
2018—Subsec. (f)(2)(A)(ii). Pub. L. 115–141, § 401(a)(149), substituted “decrease” for “decreased”. Subsec. (i). Pub. L. 115–141, § 401(a)(150), substituted “willful” for “willfull”. 2010—Subsec. (f)(2)(B). Pub. L. 111–325, § 301(a)(2), inserted “or reported (as the case may be)” after “designated”. Subsec. (j). Pub. L. 111–325, § 501(b), struck out subsec. (j). Text read as follows: “For assessable penalty with respect to liability for tax of a regulated investment company which is allowed a deduction under subsection (a), see section 6697.” 2004—Subsec. (e)(4). Pub. L. 108–357 added par. (4). 1986—Subsec. (j). Pub. L. 99–514 substituted “regulated investment company” for “qualified investment entity”. 1980—Subsec. (f). Pub. L. 96–222 substituted in heading “Deficiency” for “Efficiency” and in par. (2)(A)(i) “(computed without regard” for “computed without regard”.
Statutory Notes and Related Subsidiaries
Effective Date
of 2010 AmendmentAmendment by section 301(a)(2) of Pub. L. 111–325 applicable to taxable years beginning after Dec. 22, 2010, see section 301(h) of Pub. L. 111–325, set out as a note under section 852 of this title. Pub. L. 111–325, title V, § 501(c), Dec. 22, 2010, 124 Stat. 3554, provided that: “The
Amendments
made by this section [amending this section and repealing section 6697 of this title] shall apply to taxable years beginning after the date of the enactment of this Act [Dec. 22, 2010].”
Effective Date
of 2004 AmendmentAmendment by Pub. L. 108–357 applicable to statements filed after Oct. 22, 2004, see section 243(g)(4)(E) of Pub. L. 108–357, set out as a note under section 856 of this title.
Effective Date
of 1986 AmendmentAmendment by Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, see section 669 of Pub. L. 99–514, set out as a note under section 856 of this title.
Effective Date
Pub. L. 95–600, title III, § 362(e), Nov. 6, 1978, 92 Stat. 2852, as amended by Pub. L. 96–222, title I, § 103(a)(11)(A), Apr. 1, 1980, 94 Stat. 212; Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: “The
Amendments
made by this section [enacting this section, amending section 316, 381, 852, 857, 6422, 6503, 6515, and 6697 of this title, repealing section 859 of this title, and redesignating prior section 860 as 859 of this title] shall apply with respect to determinations (as defined in section 860(e) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]) after the date of the enactment of this Act [Nov. 6, 1978].”
Reference
Citations & Metadata
Citation
26 U.S.C. § 860
Title 26, Internal Revenue Code
Last Updated
Sep 23, 2026
Release point: 119-110