U.S. Code > Title 26 Internal Revenue Code > Subtitle A—Income Taxes (§§ 1—1564) > CHAPTER 1—NORMAL TAXES AND SURTAXES (§§ 1—1400U3) > Subchapter B—Computation of Taxable Income (§§ 61—291) > PART VIII—SPECIAL DEDUCTIONS FOR CORPORATIONS (§§ 241—250) > § 246. Rules applying to deductions for dividends received

§ 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).