Treasury Regulations, Subchapter A, Sec. 1.172-2

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(a) Modification of deductions. A net operating loss is sustained by a corporation in any taxable year if and to the extent that, for such year, there is an excess of deductions allowed by chapter 1 of the Code over gross income computed thereunder. In determining the excess of deductions over gross income for such purpose—

(1) Items not deductible. No deduction shall be allowed under—

(i) Section 172 for the net operating loss deduction, and

(ii) Section 922 in respect of Western Hemisphere trade corporations;

(2) Dividends received. The 85-percent limitation provided by section 246(b) shall not apply to the deductions otherwise allowed under—

(i) Section 243(a) in respect of dividends received from domestic corporations.

(ii) Section 244 in respect of dividends received on preferred stock of public utilities, and

(iii) Section 245 in respect of dividends received from foreign corporations; and

(3) Dividends paid. The deduction granted by section 247 in respect of dividends paid on the preferred stock of public utilities shall be computed without regard to subsection (a)(1)(B) of Section 247.

(b) Example. The following example illustrates the application of paragraph (a):

Example   For the calendar year 1981, the X corporation has a gross income of $400,000 and total deductions allowed by chapter 1 of the Code of $375,000 exclusive of any net operating loss deduction and exclusive of any deduction for dividends received or paid. Corporation X in 1981 received $100,000 of dividends entitled to the benefits of section 243(a). These dividends are included in Corporation X's $400,000 gross income. Corporation X has no other deductions to which section 172(d) applies. On the basis of these facts, Corporation X has a net operating loss for the year 1981 of $60,000, computed as follows:

 
 
 
Deductions for   $375,000
    1981
Plus: Deduction  85,000
 for dividends
 received,
 computed
 without regard
  to the
 limitation
 provided in
 section 246(b)
 (85% of
 $100,000)
                -------------------------------------------------
      Total....  460,000
Less: Gross      400,000
 income for
    1981
 (including
 $100,000
 dividends)
                -------------------------------------------------
      Net        60,000
       operatin
       g loss
       for 1981
 

(c) Qualified real estate investment trusts. For taxable years ending after October 4, 1976, the net operating loss of a qualified real estate investment trust (as defined in §1.172–10(b)) is computed by taking into account the adjustments described in section 857(b)(2) (other than the deduction for dividends paid, as defined in section 561), as well as the modifications required by paragraph (a)(1) of this section. Thus, for example, the special deductions for dividends received, etc., provided in part VIII of subchapter B (other than section 248), as well as the net operating loss deduction under section 172, are not allowed in computing the net operating loss of a qualified real estate investment trust.

[T.D. 8107, 51 FR 43345, Dec. 2, 1986]