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TITLE 26-INTERNAL REVENUE CODE the real estate investment trust taxable income for the taxable year (determined without regard to the deduction for divi- dends paid (as defined in section 561) and by excluding any net capital gain); and (it) 95 percent (90 percent for taxable years beginning before January 1, 1980) of the excess of the net income from foreclo- sure property over the tax imposed on such income by subsection (b)(4)(A); minus (B) the sum of- (I) the amount of any penalty imposed on the real estate investment trust by sec- tion 6697 which is paid by such trust during the taxable year; and (ii) the net loss derived from prohibited transactions, and (2). 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. (b) Method of taxation of real estate investment trusts and holders of shares or certificates of beneficial interest (1) Imposition of normal tax and surtax on real estate investment trusts There is hereby imposed for each taxable year on the real estate investment trust tax- able income of every real estate investment trust a normal tax and surtax 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 pro- vided in part VIII (except section 248) of subchapter B (section 241 and following, re- lating to the deduction for dividends re- ceived, 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 attribut- able to the amount excluded under subpara- graph (D). (C) The taxable income shall be computed without regard to section 443(b) (relating to computation of tax on change of annual ac- counting 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 paragraph (5) for the taxable year. (F) There shall be excluded an amount equal to any net income derived from pro- hibited transactions and there shall be in- cluded an amount equal to any net loss de- rived from prohibited transactions. (3) Capital gains (A) Alternative tax in case of capital gains If for any taxable year a real estate in- vestment trust has a net capital gain, then, in lieu of the tax imposed by subsection (b)(1), there is hereby imposed a tax (if such tax is less than the tax imposed by such subsection) which shall consist of the sum of- (I) a tax, computed as provided in sub- section (b)(1), on the real estate invest- ment trust taxable income (determined by excluding such net capital gain and by computing the deduction for dividends paid without regard to capital gain divi- dends), and (ii) 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. (B) Treatment of capital gain dividends by share. holders A capital gain dividend shall be treated by the shareholders or holders of beneficial in- terests as a gain from the sale or exchange of a capital asset held for more than 9 months. (C) 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 in- vestment 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; except that, if there is an increase in the excess described in subparagraph (A)(i) of this paragraph for such year which results from a determi- nation (as defined in section 859(c)), such designation may be made with respect to such increase at any time before the expira- tion of 120 days after the date of such de- termination. 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 de- scribed 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 ag- gregate amount so designated. For purposes of this subparagraph, the net capital gain shall be deemed not to exceed the real estate investment trust taxable income (de- termined without regard to the deduction for dividends paid (as defined in section 561) for the taxable year). (4) Income from foreclosure property (A) Imposition of tax There is hereby imposed for each taxable year on the net income from foreclosure property of every real estate investment trust a tax determined by applying section 11 to such income as if such income consti- tuted the taxable income of a corporation taxable under section 11. For purposes of the preceding sentence, the surtax exemp- tion shall be zero. 71-999 0 - 78 -37 (Vol. 7) § 857 Page 549