26 USC 246 - Rules applying to deductions for dividends received

U.S Code last checked for updates: Nov 22, 2024

§ 246.

Rules applying to deductions for dividends received

(a)

Deduction not allowed for dividends from certain corporations

(1)

In general

(2)

Subsection not to apply to certain dividends of Federal Home Loan Banks

(A)

Dividends out of current earnings and profits

In the case of any dividend paid by any FHLB out of earnings and profits of the FHLB for the taxable year in which such dividend was paid, paragraph (1) shall not apply to that portion of such dividend which bears the same ratio to the total dividend as—

(i)

the dividends received by the FHLB from the FHLMC during such taxable year, bears to

(ii)

the total earnings and profits of the FHLB for such taxable year.

(B)

Dividends out of accumulated earnings and profits

In the case of any dividend which is paid out of any accumulated earnings and profits of any FHLB, paragraph (1) shall not apply to that portion of the dividend which bears the same ratio to the total dividend as—

(i)

the amount of dividends received by such FHLB from the FHLMC which are out of earnings and profits of the FHLMC—

(I)

for taxable years ending after December 31, 1984, and

(II)

which were not previously treated as distributed under subparagraph (A) or this subparagraph, bears to

(ii)

the total accumulated earnings and profits of the FHLB as of the time such dividend is paid.

For purposes of clause (ii), the accumulated earnings and profits of the FHLB as of January 1, 1985, shall be treated as equal to its retained earnings as of such date.

(C)

Coordination with section 243

(D)

Definitions

For purposes of this paragraph—

(i)

FHLB

(ii)

FHLMC

(iii)

Taxable year of FHLB

(iv)

Earnings and profits

The earnings and profits of any FHLB for any taxable year shall be treated as equal to the sum of—

(I)

any dividends received by the FHLB from the FHLMC during such taxable year, and

(II)

the total earnings and profits (determined without regard to dividends described in subclause (I)) of the FHLB as reported in its annual financial statement prepared in accordance with section 20 of the Federal Home Loan Bank Act (12 U.S.C. 1440).

(b)

Limitation on aggregate amount of deductions

(1)

General rule

(2)

Effect of net operating loss

(3)

Special rules

The provisions of paragraph (1) shall be applied—

(A)

first separately with respect to dividends from 20-percent owned corporations (as defined in section 243(c)(2)) and the percentage determined under this paragraph shall be 65 percent, and

(B)

then separately with respect to dividends not from 20-percent owned corporations and the percentage determined under this paragraph shall be 50 percent and the taxable income shall be reduced by the aggregate amount of dividends from 20-percent owned corporations (as so defined).

(c)

Exclusion of certain dividends

(1)

In general

No deduction shall be allowed under section 243 ¹ 245, or 245A, in respect of any dividend on any share of stock—

(A)

which is held by the taxpayer for 45 days or less during the 91-day period beginning on the date which is 45 days before the date on which such share becomes ex-dividend with respect to such dividend, or

(B)

to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.

(2)

90-day rule in the case of certain preference dividends

In the case of stock having preference in dividends, if the taxpayer receives dividends with respect to such stock which are attributable to a period or periods aggregating in excess of 366 days, paragraph (1)(A) shall be applied—

(A)

by substituting “90 days” for “45 days” each place it appears, and

(B)

by substituting “181-day period” for “91-day period”.

(3)

Determination of holding periods

For purposes of this subsection, in determining the period for which the taxpayer has held any share of stock—

(A)

the day of disposition, but not the day of acquisition, shall be taken into account, and

(B)

paragraph (3) of section 1223 shall not apply.

(4)

Holding period reduced for periods where risk of loss diminished

The holding periods determined for purposes of this subsection shall be appropriately reduced (in the manner provided in regulations prescribed by the Secretary) for any period (during such periods) in which—

(A)

the taxpayer has an option to sell, is under a contractual obligation to sell, or has made (and not closed) a short sale of, substantially identical stock or securities,

(B)

the taxpayer is the grantor of an option to buy substantially identical stock or securities, or

(C)

under regulations prescribed by the Secretary, a taxpayer has diminished his risk of loss by holding 1 or more other positions with respect to substantially similar or related property.

The preceding sentence shall not apply in the case of any qualified covered call (as defined in section 1092(c)(4) but without regard to the requirement that gain or loss with respect to the option not be ordinary income or loss), other than a qualified covered call option to which section 1092(f) applies.

(5)

Special rules for foreign source portion of dividends received from specified 10-percent owned foreign corporations

(A)

1-year holding period requirement

For purposes of section 245A—

(i)

paragraph (1)(A) shall be applied—

(I)

by substituting “365 days” for “45 days” each place it appears, and

(II)

by substituting “731-day period” for “91-day period”, and

(ii)

paragraph (2) shall not apply.

(B)

Status must be maintained during holding period

For purposes of applying paragraph (1) with respect to section 245A, the taxpayer shall be treated as holding the stock referred to in paragraph (1) for any period only if—

(i)

the specified 10-percent owned foreign corporation referred to in section 245A(a) is a specified 10-percent owned foreign corporation at all times during such period, and

(ii)

the taxpayer is a United States shareholder with respect to such specified 10-percent owned foreign corporation at all times during such period.

(d)

Dividends from a DISC or former DISC

(Aug. 16, 1954, ch. 736, 68A Stat. 74; Pub. L. 85–866, title I, §§ 18(a), 57(c)(2), Sept. 2, 1958, 72 Stat. 1614, 1646; Pub. L. 88–272, title II, § 214(b)(2), Feb. 26, 1964, 78 Stat. 55; Pub. L. 91–172, title IV, § 434(b)(1), title V, § 512(f)(3), Dec. 30, 1969, 83 Stat. 625, 641; Pub. L. 92–178, title V, § 502(a), Dec. 10, 1971, 85 Stat. 549; Pub. L. 94–455, title X, § 1051(f)(3), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1646, 1834; Pub. L. 97–248, title II, § 213(c), Sept. 3, 1982, 96 Stat. 465; Pub. L. 98–369, div. A, title I, §§ 53(b), (d)(2), 177(b), title VIII, § 801(b)(2)(A), July 18, 1984, 98 Stat. 567, 568, 709, 995; Pub. L. 99–514, title VI, § 611(a)(3), title XII, § 1275(a)(2)(B), title XVIII, §§ 1804(b)(1)(A), (B), 1812(d)(1), Oct. 22, 1986, 100 Stat. 2249, 2598, 2798, 2835; Pub. L. 100–203, title X, § 10221(c)(1), Dec. 22, 1987, 101 Stat. 1330–409; Pub. L. 100–647, title I, § 1018(u)(10), Nov. 10, 1988, 102 Stat. 3590; Pub. L. 104–188, title I, § 1616(b)(4), Aug. 20, 1996, 110 Stat. 1856; Pub. L. 105–34, title X, § 1015(a), (b), Aug. 5, 1997, 111 Stat. 921, 922; Pub. L. 108–311, title IV, § 406(f), Oct. 4, 2004, 118 Stat. 1190; Pub. L. 108–357, title I, § 102(d)(4), title VIII, § 888(d), Oct. 22, 2004, 118 Stat. 1429, 1643; Pub. L. 109–135, title IV, § 402(a)(4), Dec. 21, 2005, 119 Stat. 2610; Pub. L. 113–295, div. A, title II, § 221(a)(41)(E), Dec. 19, 2014, 128 Stat. 4044; Pub. L. 115–97, title I, §§ 11011(d)(2), 13002(c), 13305(b)(1), 14101(b), (c)(1), 14202(b)(2), Dec. 22, 2017, 131 Stat. 2071, 2100, 2126, 2191, 2216; Pub. L. 115–141, div. U, title IV, § 401(d)(1)(D)(vi), Mar. 23, 2018, 132 Stat. 1207.)

cite as: 26 USC 246