[Code of Federal Regulations]
[Title 26, Volume 9]
[Revised as of April 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.854-1]

[Page 45]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.854-1  Limitations applicable to dividends received from regulated investment company.

    (a) In general. Section 854 provides special limitations applicable 
to dividends received from a regulated investment company for purposes 
of the exclusion under section 116 for dividends received by 
individuals, the deduction under section 243 for dividends received by 
corporations, and, in the case of dividends received by individuals 
before January 1, 1965, the credit under section 34.
    (b) Capital gain dividend. Under the provisions of section 854(a) a 
capital gain dividend as defined in section 852(b)(3) and paragraph (c) 
of Sec. 1.852-4 shall not be considered a dividend for purposes of the 
exclusion under section 116, the deduction under section 243, and, in 
the case of taxable years ending before January 1, 1965, the credit 
under section 34.
    (c) Rule for dividends other than capital gain dividends. (1) 
Section 854(b)(1) limits the amount that may be treated as a dividend 
(other than a capital gain dividend) by the shareholder of a regulated 
investment company, for the purposes of the credit, exclusion, and 
deduction specified in paragraph (b) of this section, where the 
investment company receives substantial amounts of income (such as 
interest, etc.) from sources other than dividends from domestic 
corporations, which dividends qualify for the exclusion under section 
116.
    (2) Where the ``aggregate dividends received'' (as defined in 
section 854(b)(3)(B) and paragraph (b) of Sec. 1.854-3) during the 
taxable year by a regulated investment company (which meets the 
requirements of section 852(a) and paragraph (a) of Sec. 1.852-1 for the 
taxable year during which it paid such dividend) are less than 75 
percent of its gross income for such taxable year (as defined in section 
854(b)(3)(A) and paragraph (a) of Sec. 1.854-3), only that portion of 
the dividend paid by the regulated investment company which bears the 
same ratio to the amount of such dividend paid as the aggregate 
dividends received by the regulated investment company, during the 
taxable year, bears to its gross income for such taxable year (computed 
without regard to gains from the sale or other disposition of stocks or 
securities) may be treated as a dividend for purposes of such credit, 
exclusion, and deduction.
    (3) Subparagraph (2) of this paragraph may be illustrated by the 
following example:

    Example. The XYZ regulated investment company meets the requirements 
of section 852(a) for the taxable year and has received income from the 
following sources:

Capital gains (from the sale of stock or securities).........   $100,000
Dividends (from domestic sources other than dividends             70,000
 described in section 116(b))................................
Dividend (from foreign corporations).........................      5,000
Interest.....................................................     25,000
                                                              ----------
 Total.......................................................    200,000
Expenses.....................................................     20,000
                                                              ----------
Taxable income...............................................    180,000



The regulated investment company decides to distribute the entire 
$180,000. It distributes a capital gain dividend of $100,000 and a 
dividend of ordinary income of $80,000. The aggregate dividends received 
by the regulated investment company from domestic corporations ($70,000) 
is less than 75 percent of its gross income ($100,000) computed without 
regard to capital gains from sales of securities. Therefore, an 
apportionment is required. Since $70,000 is 70 percent of $100,000, out 
of every $1 dividend of ordinary income paid by the regulated investment 
company only 70 cents would be available for the credit, exclusion, or 
deduction referred to in section 854(b)(1). The capital gains dividend 
and the dividend received from foreign corporations are excluded from 
the computation.
    (d) Dividends received from a regulated investment company during 
taxable years of shareholders ending after July 31, 1954, and subject to 
the Internal Revenue Code of 1939. For the application of section 854 to 
taxable years of shareholders of a regulated investment company ending 
after July 31, 1954, and subject to the Internal Revenue Code of 1939, 
see Sec. 1.34-5 and Sec. 1.116-2.

[T.D. 6500, 25 FR 11910, Nov. 26, 1960, as amended by T.D. 6921, 32 FR 
8756, June 20, 1967]

[[Page 46]]