Internal Revenue Code:Sec. 246. Rules applying to deductions for dividends received

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Contents


Location in Internal Revenue Code


     TITLE 26 - INTERNAL REVENUE CODE
      Subtitle A - Income Taxes
       CHAPTER 1 - NORMAL TAXES AND SURTAXES
        Subchapter B - Computation of Taxable Income
         PART VIII - SPECIAL DEDUCTIONS FOR CORPORATIONS
       

Statute

    Sec. 246. Rules applying to deductions for dividends received
 
    (a) Deduction not allowed for dividends from certain corporations
      (1) In general
        The deductions allowed by sections 243, 244, and 245 shall not
      apply to any dividend from a corporation which, for the taxable
      year of the corporation in which the distribution is made, or for
      the next preceding taxable year of the corporation, is a
      corporation exempt from tax under section 501 (relating to
      certain charitable, etc., organizations) or section 521 (relating
      to farmers' cooperative associations).
      (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
          To the extent that paragraph (1) does not apply to any
        dividend by reason of subparagraph (A) or (B) of this
        paragraph, the requirement contained in section 243(a) that the
        corporation paying the dividend be subject to taxation under
        this chapter shall not apply.
        (D) Definitions
          For purposes of this paragraph -
          (i) FHLB
            The term ''FHLB'' means any Federal Home Loan Bank.
          (ii) FHLMC
            The term ''FHLMC'' means the Federal Home Loan Mortgage
          Corporation.
          (iii) Taxable year of FHLB
            The taxable year of an FHLB shall, except as provided in
          regulations prescribed by the Secretary, be treated as the
          calendar year.
          (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
        Except as provided in paragraph (2), the aggregate amount of
      the deductions allowed by sections 243(a)(1), 244(a), and
      subsection (a) or (b) of section 245 shall not exceed the
      percentage determined under paragraph (3) of the taxable income
      computed without regard to the deductions allowed by sections
      172, 199, 243(a)(1), 244(a), subsection (a) or (b) of section 245, and
      247, without regard to any adjustment under section 1059, and
      without regard to any capital loss carryback to the taxable year
      under section 1212(a)(1).
      (2) Effect of net operating loss
        Paragraph (1) shall not apply for any taxable year for which
      there is a net operating loss (as determined under section 172).
      (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 80
        percent, and
          (B) then separately with respect to dividends not from
        20-percent owned corporations and the percentage determined
        under this paragraph shall be 70 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, 244, or 245,
      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.
    (d) Dividends from a DISC or former DISC
      No deduction shall be allowed under section 243 in respect of a
    dividend from a corporation which is a DISC or former DISC (as
    defined in section 992(a)) to the extent such dividend is paid out
    of the corporation's accumulated DISC income or previously taxed
    income, or is a deemed distribution pursuant to section 995(b)(1).
    (e) Certain distributions to satisfy requirements
      No deduction shall be allowed under section 243(a) with respect
    to a dividend received pursuant to a distribution described in
    section 936(h)(4).
 

Sources

    (Aug. 16, 1954, ch. 736, 68A Stat. 74; Pub. L. 85-866, title I,
    Sec. 18(a), 57(c)(2), Sept. 2, 1958, 72 Stat. 1614, 1646; Pub. L.
    88-272, title II, Sec. 214(b)(2), Feb. 26, 1964, 78 Stat. 55; Pub.
    L. 91-172, title IV, Sec. 434(b)(1), title V, Sec. 512(f)(3), Dec.
    30, 1969, 83 Stat. 625, 641; Pub. L. 92-178, title V, Sec. 502(a),
    Dec. 10, 1971, 85 Stat. 549; Pub. L. 94-455, title X, Sec.
    1051(f)(3), title XIX, Sec. 1906(b)(13)(A), Oct. 4, 1976, 90 Stat.
    1646, 1834; Pub. L. 97-248, title II, Sec. 213(c), Sept. 3, 1982,
    96 Stat. 465; Pub. L. 98-369, div.  A, title I, Sec. 53(b), (d)(2),
    177(b), title VIII, Sec. 801(b)(2)(A), July 18, 1984, 98 Stat. 567,
    568, 709, 995; Pub. L. 99-514, title VI, Sec. 611(a)(3), title XII,
    Sec. 1275(a)(2)(B), title XVIII, Sec. 1804(b)(1)(A), (B),
    1812(d)(1), Oct. 22, 1986, 100 Stat. 2249, 2598, 2798, 2835; Pub.
    L. 100-203, title X, Sec. 10221(c)(1), Dec. 22, 1987, 101 Stat.
    1330-409; Pub. L. 100-647, title I, Sec. 1018(u)(10), Nov. 10,
    1988, 102 Stat. 3590; Pub. L. 104-188, title I, Sec. 1616(b)(4),
    Aug. 20, 1996, 110 Stat. 1856; Pub. L. 105-34, title X, Sec.
    1015(a), (b), Aug. 5, 1997, 111 Stat. 921, 922.)
 

Miscellaneous

                                 AMENDMENTS
      2004 - Subsec.888(d),Pub.L.108-357, the last sentence of section
     246(c) is amended by inserting: ", other than a qualified 
     covered call option to which section 1092(f) applies" before the
     period at the end.
      2004 - Subsec.406(f)(2),Pub.L.108-311, amended Sec.246(c)(2)(B)
    by striking "180-day period" and inserting "181-day period" and
    striking "90-day period" and inserting "91-day period".
      2004 - Subsec.406(f)(1),Pub.L.108-311, amended Sec.246(c)(1)(A)
    by striking "90-day period" and inserting "91-day period".
      1997 - Subsec. (c)(1)(A). Pub. L. 105-34, Sec. 1015(a), amended
    subpar. (A) generally.  Prior to amendment, subpar. (A) read as
    follows: ''which is held by the taxpayer for 45 days or less, or''.
      Subsec. (c)(2). Pub. L. 105-34, Sec. 1015(b)(1), amended heading
    and text of par. (2) generally.  Prior to amendment, text read as
    follows: ''In the case of any stock having preference in dividends,
    the holding period specified in paragraph (1)(A) shall be 90 days
    in lieu of 45 days if the taxpayer receives dividends with respect
    to such stock which are attributable to a period or periods
    aggregating in excess of 366 days.''
      Subsec. (c)(3). Pub. L. 105-34, Sec. 1015(b)(2), inserted ''and''
    at end of subpar. (A), redesignated subpar. (C) as (B), and struck
    out former subpar. (B) which read as follows: ''there shall not be
    taken into account any day which is more than 45 days (or 90 days
    in the case of stock to which paragraph (2) applies) after the date
    on which such share becomes ex-dividend, and''.
      1996 - Subsec. (f). Pub. L. 104-188 struck out subsec. (f) which
    provided a cross reference to section 596 of this title for special
    rule relating to mutual savings banks, etc., to which section 593
    applies.
      1988 - Subsec. (c)(1)(A). Pub. L. 100-647 substituted ''which''
    for ''Which''.
      1987 - Subsec. (b)(1). Pub. L. 100-203, Sec. 10221(c)(1)(A),
    substituted ''the percentage determined under paragraph (3)'' for
    ''80 percent''.
      Subsec. (b)(3). Pub. L. 100-203, Sec. 10221(c)(1)(B), added par.
    (3).
      1986 - Subsec. (a)(2)(B). Pub. L. 99-514, Sec. 1812(d)(1)(A),
    substituted ''In'' for ''For purposes of subparagraph (A), in'' in
    introductory provisions and substituted cl. (i)(II) for former cl.
    (i)(II) which read as follows: ''which were not taken into account
    under subparagraph (A), bears to''.
      Subsec. (a)(2)(C), (D). Pub. L. 99-514, Sec. 1812(d)(1)(B), (C),
    added subpar. (C), redesignated former subpar. (C) as (D), and
    added cl. (iv) to subpar. (D).
      Subsec. (b)(1). Pub. L. 99-514, Sec. 611(a)(3), substituted ''80
    percent'' for ''85 percent''.
      Subsec. (c)(1)(A). Pub. L. 99-514, Sec. 1804(b)(1)(A), amended
    subpar. (A) generally.  Prior to amendment, subpar. (A) read as
    follows: ''which is sold or otherwise disposed of in any case in
    which the taxpayer has held such share for 45 days or less, or''.
      Subsec. (c)(4). Pub. L. 99-514, Sec. 1804(b)(1)(B), substituted
    ''determined for purposes of this subsection'' for ''determined
    under paragraph (3)''.
      Subsec. (e). Pub. L. 99-514, Sec. 1275(a)(2)(B), struck out ''or
    934(e)(3)'' after ''936(h)(4)''.
      1984 - Subsec. (a). Pub. L. 98-369, Sec. 177(b), amended subsec.
    (a) generally, designating existing provisions as par. (1) and
    adding par. (2).
      Subsec. (b)(1). Pub. L. 98-369, Sec. 801(b)(2)(A), substituted
    ''subsection (a) or (b) of section 245'' for ''245'' in two places.
      Pub. L. 98-369, Sec. 53(d)(2), substituted ''without regard to
    any adjustment under section 1059, and without regard'' for ''and
    without regard''.
      Subsec. (c)(1)(A). Pub. L. 98-369, Sec. 53(b)(1), substituted
    ''45'' for ''15''.
      Subsec. (c)(1)(B). Pub. L. 98-369, Sec. 53(b)(3), substituted
    ''to make related payments with respect to positions in
    substantially similar or related property'' for ''to make
    corresponding payments with respect to substantially identical
    stock or securities''.
      Subsec. (c)(2). Pub. L. 98-369, Sec. 53(b)(1), substituted ''45''
    for ''15''.
      Subsec. (c)(3). Pub. L. 98-369, Sec. 53(b)(4), struck out last
    sentence which directed that the holding periods determined under
    the preceding provisions of this paragraph be appropriately reduced
    (in the manner provided in regulations prescribed by the Secretary)
    for any period (during such holding periods) in which the taxpayer
    had an option to sell, was under a contractual obligation to sell,
    or had made (and not closed) a short sale of, substantially
    identical stock or securities.
      Subsec. (c)(3)(B). Pub. L. 98-369, Sec. 53(b)(1), substituted
    ''45'' for ''15''.
      Subsec. (c)(4). Pub. L. 98-369, Sec. 53(b)(2), added par. (4).
      1982 - Subsecs. (e), (f). Pub. L. 97-248 added subsec. (e) and
    redesignated former subsec. (e) as (f).
      1976 - Subsec. (a). Pub. L. 94-455, Sec. 1051(f)(3), struck out
    references to dividends from corporations organized under the China
    Trade Act, 1922, and corporations to which section 931 (relating to
    income from sources within possessions of the United States)
    applies.
      Subsec. (c)(3). Pub. L. 94-455, Sec. 1906(b)(13)(A), struck out
    ''or his delegate'' after ''Secretary''.
      1971 - Subsecs. (d), (e). Pub. L. 92-178 added subsec. (d) and
    redesignated former subsec. (d) as (e).
      1969 - Subsec. (b)(1). Pub. L. 91-172, Sec. 512(f)(3),
    substituted ''and 247, and without regard to any capital loss
    carryback to the taxable year under section 1212(a)(1)'' for ''and
    247''.
      Subsec. (d). Pub. L. 91-172, Sec. 434(b)(1), added subsec. (d).
      1964 - Subsec. (b). Pub. L. 88-272 substituted ''243(a)(1),
    244(a)'' for ''243(a), 244'' wherever appearing.
      1958 - Subsec. (b)(1). Pub. L. 85-866, Sec. 57(c)(2), substituted
    ''243(a)'' for ''243'' wherever appearing.
      Subsec. (c). Pub. L. 85-866, Sec. 18(a), added subsec. (c).
                      EFFECTIVE DATE OF 2004 AMENDMENT
     Amendment by Pub.L.108-357,Sec.888(d):  shall apply to positions
     established on or after the date of the enactment of this Act.
                      EFFECTIVE DATE OF 1997 AMENDMENT
      Section 1015(c) of Pub. L. 105-34 provided that:
      ''(1) In general. - The amendments made by this section (amending
    this section) shall apply to dividends received or accrued after
    the 30th day after the date of the enactment of this Act (Aug. 5,
    1997).
      ''(2) Transitional rule. - The amendments made by this section
    shall not apply to dividends received or accrued during the 2-year
    period beginning on the date of the enactment of this Act if -
        ''(A) the dividend is paid with respect to stock held by the
      taxpayer on June 8, 1997, and all times thereafter until the
      dividend is received,
        ''(B) such stock is continuously subject to a position
      described in section 246(c)(4) of the Internal Revenue Code of
      1986 on June 8, 1997, and all times thereafter until the dividend
      is received, and
        ''(C) such stock and position are clearly identified in the
      taxpayer's records within 30 days after the date of the enactment
      of this Act.
    Stock shall not be treated as meeting the requirement of
    subparagraph (B) if the position is sold, closed, or otherwise
    terminated and reestablished.''
                      EFFECTIVE DATE OF 1996 AMENDMENT
      Amendment by Pub. L. 104-188 applicable to taxable years
    beginning after Dec. 31, 1995, see section 1616(c) of Pub. L.
    104-188, set out as a note under section 593 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 1987 AMENDMENT
      Amendment by Pub. L. 100-203 applicable to taxable years
    beginning after Dec. 31, 1987, see section 10221(e)(2) of Pub. L.
    100-203, as amended, set out as a note under section 243 of this
    title.
                      EFFECTIVE DATE OF 1986 AMENDMENT
      Section 611(b) of Pub. L. 99-514 provided that:
      ''(1) In general. - The amendments made by subsection (a)
    (amending this section and sections 243, 244, 246A, and 805 of this
    title) shall apply to dividends received or accrued after December
    31, 1986, in taxable years ending after such date.
      ''(2) Amendment relating to limitation on deductions. - The
    amendment made by subsection (a) to section 246(b) of the Internal
    Revenue Code of 1986 shall apply to taxable years beginning after
    December 31, 1986.''
      Amendment by section 1275(a)(2)(B) of Pub. L. 99-514 applicable
    to taxable years beginning after Dec. 31, 1986, with certain
    exceptions and qualifications, see section 1277 of Pub. L. 99-514,
    set out as a note under section 931 of this title.
      Section 1804(b)(1)(C) of Pub. L. 99-514 provided that: ''The
    amendments made by this paragraph (amending this section) shall
    apply to stock acquired after March 1, 1986.''
      Amendment by section 1812(d)(1) of Pub. L. 99-514 effective,
    except as otherwise provided, as if included in the provisions of
    the Tax Reform Act of 1984, Pub. L. 98-369, div.  A, to which such
    amendment relates, see section 1881 of Pub. L. 99-514, set out as a
    note under section 48 of this title.
                      EFFECTIVE DATE OF 1984 AMENDMENT
      Amendment by section 53(d)(2) of Pub. L. 98-369 applicable to
    distributions after Mar. 1, 1984, in taxable years ending after
    such date, and amendment of subsec. (c) of this section by section
    53(b) of Pub. L. 98-369, applicable to stock acquired after July
    18, 1984, in taxable years ending after such date, see section
    53(e)(1), (2) of Pub. L. 98-369, set out as an Effective Date note
    under section 1059 of this title.
      Amendment by section 177(b) of Pub. L. 98-369, effective Jan. 1,
    1985, see section 177(d) of Pub. L. 98-369, set out as a note under
    section 172 of this title.
      Amendment by section 801(b)(2)(A) of Pub. L. 98-369 applicable to
    transactions after Dec. 31, 1984, in taxable years ending after
    such date, see section 805(a)(1) of Pub. L. 98-369, as amended, set
    out as a note under section 245 of this title.
                      EFFECTIVE DATE OF 1982 AMENDMENT
      Amendment by Pub. L. 97-248 applicable to taxable years beginning
    after Dec. 31, 1982, see section 213(e)(1) of Pub. L. 97-248, set
    out as a note under section 936 of this title.
                      EFFECTIVE DATE OF 1976 AMENDMENT
      For effective date of amendment by section 1051(f)(3) of Pub. L.
    94-455, see section 1051(i) of Pub. L. 94-455, set out as a note
    under section 27 of this title.
      Amendment by section 1906(b)(13)(A) of Pub. L. 94-455 effective
    Feb. 1, 1977, see section 1906(d)(1) of Pub. L. 94-455, set out as
    a note under section 6013 of this title.
                      EFFECTIVE DATE OF 1971 AMENDMENT
      Amendment by Pub. L. 92-178 applicable with respect to taxable
    years ending after Dec. 31, 1971, except that a corporation may not
    be a DISC for any taxable year beginning before Jan. 1, 1972, see
    section 507 of Pub. L. 92-178, set out as an Effective Date note
    under section 991 of this title.
                      EFFECTIVE DATE OF 1969 AMENDMENT
      Amendment by section 512(f)(3) of Pub. L. 91-172 applicable with
    respect to net capital losses sustained in taxable years beginning
    after Dec. 31, 1969, see section 512(g) of Pub. L. 91-172, set out
    as a note under section 1212 of this title.
      Section 434(c) of Pub. L. 91-172 provided that: ''The amendments
    made by this section (enacting section 596 of this title and
    amending this section) shall apply to taxable years beginning after
    July 11, 1969.''
                      EFFECTIVE DATE OF 1964 AMENDMENT
      Amendment by Pub. L. 88-272 applicable to dividends received in
    taxable years ending after Dec. 31, 1963, see section 214(c) of
    Pub. L. 88-272, set out as a note under section 243 of this title.
                      EFFECTIVE DATE OF 1958 AMENDMENT
      Section 18(b) of Pub. L. 85-866 provided that: ''The amendment
    made by subsection (a) (amending this section) shall apply with
    respect to taxable years ending after December 31, 1957, but only
    with respect to shares of stock acquired or short sales made after
    December 31, 1957.''
      Amendment by section 57(c)(2) of Pub. L. 85-866 applicable with
    respect to taxable years beginning after Sept. 2, 1958, see section
    57(d) of Pub. L. 85-866, set out as a note under section 243 of
    this title.
             PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989
      For provisions directing that if any amendments made by subtitle
    A or subtitle C of title XI (Sec. 1101-1147 and 1171-1177) or title
    XVIII (Sec. 1800-1899A) of Pub. L. 99-514 require an amendment to
    any plan, such plan amendment shall not be required to be made
    before the first plan year beginning on or after Jan. 1, 1989, see
    section 1140 of Pub. L. 99-514, as amended, set out as a note under
    section 401 of this title.
 

References

                   SECTION REFERRED TO IN OTHER SECTIONS
      This section is referred to in sections 163, 172, 805, 810, 834,
    852, 854, 857, 901, 1059, 1092, 1259 of this title.
 

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