26 U.S.C. § 243 — Dividends received by corporations

(a) General rule. If a corporation receives dividends from a domestic corporation that itself must pay taxes under this chapter, the receiving corporation can deduct part of those dividends from its own income. The deduction is 50% of the dividend in most cases. It's 100% if a small business investment company (operating under the Small Business Investment Act of 1958) receives the dividend. It's also 100% for "qualifying dividends," which subsection (b) defines. (b) Qualifying dividends. A dividend counts as a "qualifying dividend" if two things are true. First, on the day the dividend is received, the receiving corporation and the paying corporation belong to the same affiliated group of companies. Second, the dividend comes from earnings the paying corporation made in a tax year that ended after December 31, 1963, and during that entire year both corporations were part of the same affiliated group. "Affiliated group" generally has the meaning given in section 1504(a), except two exceptions in that section (1504(b)(2) and 1504(c)) don't apply here. The group must also be consistent about foreign taxes: the dividend won't count as qualifying if, in the same year, one or more group members claim the benefit of the foreign tax credit under section 901 while other members instead claim a deduction for those foreign taxes. If the affiliated group includes a life insurance company taxed under section 801, dividends from any group member only count as qualifying if the group has made a special election for that tax year — unless the dividend is the specific kind described in paragraph (1)(B)(ii). While this election is in effect, the controlled-corporation rules in part II of subchapter B of chapter 6 apply without regard to two exceptions (sections 1563(a)(4) and 1563(b)(2)(D)); and a distribution by an insurance company member doesn't count as qualifying if it comes from earnings from a year when the election wasn't in effect and the company wasn't part of the controlled group only because of section 1563(b)(2)(D). The common parent company of the group makes this election, in the way the Secretary requires by regulation. Once made, the election binds every member of the group, and only the Secretary can approve revoking it. (c) Increased percentage for dividends from 20-percent owned corporations. If the paying corporation is a "20-percent owned corporation" — meaning the receiving corporation owns at least 20% of its stock, by both vote and value — the deduction under subsection (a)(1) rises from 50% to 65%. Certain stock described in section 1504(a)(4) doesn't count toward that 20% ownership test. (d) Special rules for certain distributions. For purposes of subsection (a): an amount deducted under section 591 as a dividend paid by a mutual savings bank isn't treated as a dividend here. A dividend from a regulated investment company (a mutual fund) is instead governed by the limits in section 854. And a dividend from a real estate investment trust that qualifies under part II of subchapter M isn't treated as a dividend at all for this section. (e) Certain dividends from foreign corporations. For purposes of subsection (a), and also for purposes of section 245, a dividend paid by a foreign corporation counts as if it came from a domestic corporation — but only for the part of that dividend that comes from earnings a domestic corporation built up while it was itself subject to tax under this chapter (or an earlier version of this law).